Friday, October 13, 2017

Nonprofit v. Benefit Corporation v. Traditional For-Profit Hospitals

Earlier this week, my two-year old daughter was in the pediatric ICU with a virus that attacked her lungs. We spent two nights at The Monroe Carell Jr. Children's Hospital at Vanderbilt (“Vanderbilt Children’s). Thankfully, she was released Wednesday afternoon and is doing well. Unfortunately, many of the children on her floor had been in the hospital for weeks or months and were not afforded such a quick recovery. There cannot be many places more sad than the pediatric ICU.

Since returning home, I confirmed that Vanderbilt Children’s is a nonprofit organization, as I suspected. I do wonder whether the hospital would be operated the same if it were a benefit corporation or as a traditional corporation.

Some of the decisions made at the hospital seems like they would have been indefensible from a shareholder perspective, if the hospital had been for-profit. Vanderbilt Children’s has a captive market, with no serious competitors that I know of in the immediate area. Yet, the hospital doesn’t charge for parking. If they did, I don’t think it would impact anyone’s decision to choose them because, again, there aren’t really other options, and the care is the important part anyway. The food court was pretty reasonably priced, and they probably could have charged double without seriously impacting demand; the people at the hospital valued time with their children more than a few dollars. The hospital was beautifully decorated with art aimed at children – for example, with a big duck on the elevator ceiling, which my daughter absolutely loved. There were stars on the ceiling of the hospital rooms, cartoons on TVs in every room, etc. All of this presumably cost more than a drab room, and perhaps it was all donated, but assuming it actually cost more, I am not sure those things would result in any financial return on investment.

As we have discussed many times on this blog, even in the traditional for-profit setting, the business judgment rule likely protects the decisions of the board of directors, even if the promised ROI seems poor. But at what point – especially when the board knows there will be no return on the investment at all - is it waste? (Note: Question sparked by a discussion that Stefan Padfied, Josh Fershee, and I had in Knoxville after a session at the UTK business law conference this year). And, in any event, the Dodge and eBay cases may lead to some doubt in the way a case may play out. And even if the law is highly unlikely to enforce shareholder wealth maximization, the norm in traditional for-profit corporations may lead to directorial decisions that we find problematic as a society, especially in a hospital setting.

Now, maybe the Hippocratic Oath, community expectations, and various regulations make it so nonprofit and forprofit hospitals operate similarly. As a father of a patient, however, even as a free market inclined professor, I would prefer hospitals to be nonprofit and clearly focused on care first. Also, some forprofit hospitals are supposedly considering going the benefit corporation route, which may be a step in the right direction – at least they have an obligation to consider various stakeholders (even if, currently, the statutory enforcement mechanisms are extremely weak) and at least there are some reporting requirements (even if , currently, reporting compliance is miserable low in the states I have examined and the statutory language is painfully vague).

I am not sure I have ever been in a situation where I would have paid everything I had, and had no other good options for the immediate need, and yet I still did not feel taken advantage of by the organization. There is much more that could be said on these issues, but I do wonder whether organizational form was important here. And, if so, what is the solution? Require hospitals to be nonprofits (or at least benefit corporations, if those statutes were amended to add more teeth)?

Business Associations, Corporate Governance, Corporations, CSR, Delaware, Ethics, Family, Haskell Murray, Social Enterprise | Permalink


Just commenting to say I'm really glad your daughter is okay, and I'm sorry you had to go through that.

Posted by: Ann Lipton | Oct 13, 2017 4:04:21 AM

First, so glad your daughter has recovered well. I, too, have spent many an evening in the Monroe Carrell, Jr., emergency room (daughter ate toad stools at daycare, crushed a vertebra on a trampoline while with grandparents, etc.). I truly hope that you are blessed to avoid any more trips. I, too, laud the Monroe Carrell, Jr., hospital for the same reasons as you.

[In full disclosure preceding the following comments, my wife has been a financial analyst with HCA for 21 years and my views are shaped by some vicarious insight. Additionally, because of Monroe Carrell, Jr.’s unique positioning and services, HCA employees children have always had coverage by this pediatric hospital.]

I think it is incredibly important to note that, absent IRC 501(r) passed in conjunction with Obamacare and for which regulations are still somewhat new (2012), for-profit and non-profit hospitals have traditionally operated in very similar fashion – including legal process for collection of receivables. The introduction of 501(r), for many hospitals, totally changed operation and hospitals around the country actually explored conversion to for-profit in the face of the burdens imposed. In fact, post 501(r), you can Google the number of States that have become very aggressive with non-profit (501(c)(3)) hospitals based upon that own State’s definition of sufficiently charitable delivery of healthcare services. Thus, there are hospitals in various States that have lost their exemption from State and local property taxes.

In Nashville, the Monroe Carrell, Jr. (MCJ), hospital (BTW: my family business built the custom equipment in its food court) was long the single source as a Middle Tennessee pediatric hospital and for certain types of care still remains the sole provider (HCA having recently stepped into the pediatric services market; but MCJ has services not offered). In addition to MCJ, the other truly high profile pediatric hospitals that have even “better served” for long periods of time include St. Jude in Memphis and the Shriner’s Hospitals. All these facilities, given my understanding, have similarly ornate décor aimed at children.

In that free market environment, where non-profits are offering services and décor (which is wonderfully bright and engaging) you can be assured that for-profits that seek to compete will provide similar facilities. Thus, for-profit boards who wish to service a market segment will seek to provide superior services and facilities without chagrin.

However, if you think for one moment that non-profits aren’t out fighting for market share along with for-profits you should follow the battles between these providers where someone wishes to add more beds, a maternity ward, NICU or a new facility (which are licensed by the State) in this or a surrounding county. They constantly wrestle with one another and a non-profit competitor takes no different approach than for-profit in that war. Do not deceive yourself that there is any more or less beneficent attitude between non-profits and for-profits.

Posted by: Tom N | Oct 13, 2017 6:50:58 AM

Interesting. Serious question, though: Would you feel the same about a physician who was in private practice (who makes money off each individual patient directly) instead of one working for a nonprofit? My own kids' pediatrician is in private practice and has been vastly more responsive and kid-friendly than any of the nonprofit children's hospitals we've been to.

Posted by: Frank Snyder | Oct 13, 2017 8:20:07 AM

Thoughtful post, Haskell, and I am glad to hear your daughter is on the mend. That is no fun at all. We had our son in DC Children’s Hospital when he was 9 months old with a nasty bout of norovirus. It’s always scary, and we, too, were thankful for the care.

I am not sure about requiring hospitals to be nonprofit or at least more stakeholder friendly. I definitely like the idea, but I can’t help but wonder if beautiful hospitals like Vanderbilt’s exist in part because of the existence of less appealing hospitals that exist because of the current structure. As I know you know, mandates so often have unintended consequences that I am simply not sure it works. That said, I would be opening to trying to figure out if mandates (or perhaps incentives) to pursue the nonprofit route would lead to better care and service on a larger scale. Great questions, and thanks for posting.

Posted by: Joshua Fershee | Oct 13, 2017 8:27:08 AM

Thanks all. My post was intended as more of a question than an answer. I truly do not know if organizational form is important in this context. Tom, I appreciate the additional information, which is much more than I knew.

As to competition, and I think this goes to Frank's comment as well, I think we see the benefits of the free market when there are actually multiple players. So, for example, we did get to choose where Katie gave birth to our daughter, and so I would expect the competition to cause nonprofits and forprofits hospitals, in that area of care, to offer more to entice customers. It may be the case that Vandy competes with local hospitals and with out of town hospitals like St. Jude's for certain types of care, and maybe that is driving much of what I noticed, but, again, for the immediate attention we needed, I think Vandy was our only option.

I also have a choice in my primary care provider and expect those doctors to respond to market competition. This is no great revelation, but the products/prices produced from monopolies are typically not very good for customers (see, e.g., Comcast in my area, though, thankfully, substitutes are emerging.)

Posted by: Haskell Murray | Oct 13, 2017 10:08:48 AM

I wholeheartedly agree with your sentiments regarding monopolies. This extends to the LSAC who owns the LSAT and NCBE who owns the Multi-State Bar Examination. The LSAC’s intractability and inflexibility have at least resulted in law schools accepting the GRE in lieu. The NCBE, in protection of its copyrights, has turned the law examination into a foray almost as bad as “pat downs” by the TSA at airports. At some point, something is going to have to give.

As additional information, charitable treatment policy for St. Jude is at . This policy was in place long before 501(r). As time passes, people forget the entertainer Danny Thomas;; and his founding of St. Jude. His production of the Andy Griffith Show has outlasted his own show. The county where I went to high school hosts the World’s Largest Coon Hunt from which all proceeds have been donated to St. Jude for at least 37 years. As a result, that county contributes more to St. Jude per capita than any other county in the US.

The charitable treatment policy for the Shriner’s Hospitals is at: . Having a friend whose child was affected by spina bifida, he has long sung their praises. His child, now gainfully employed and possessing a Masters Degree, required 24 or more operations during the course of her life and Shriner’s deferred the majority of the costs.

Posted by: Tom N | Oct 14, 2017 8:36:45 AM

Haskell, I'm glad your daughter's story has a happy ending. Regarding the difference between for-profit and non-profit hospitals, I encourage you to read Jill R. Horowitz & Austin Nichols, What Do Nonprofits Maximize? Nonprofit Hospital Service Provision and Market Ownership Mix, Nat’l Bureau of Econ. Research (July 2007), It provides some insight into why we have this somewhat unique (only higher ed seems similar) mix of nonprofit, public and for-profit providers in the health care space.

Posted by: Matthew Bruckner | Oct 14, 2017 6:09:26 PM

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