What is the main difference between a for-profit and not for-profit hospital group of answer choices?

With few exceptions, both investor-owned and nonprofit hospitals are organized as corporations. A handful of investor-owned hospitals may still be set up as general or limited partnerships (mostly those owned by a few physicians), and a few nonprofit hospitals may be organized as unincorporated associations, but the corporate form is so overwhelmingly prevalent in the field that this paper will address only the legal issues arising out of the use of the corporate form.

Investor-owned hospitals are generally operated as either a separate proprietary "business" corporation or as subsidiaries of multihospital systems.2 Even among the hospitals that are subsidiaries of holding company chains, however, many individual hospitals are separate corporations and responsible to a certain degree for their own affairs, subject to the ultimate control of the holding company. Thus, the discussion that follows is equally applicable to freestanding investor-owned hospitals and those integrated into hospital chains. It should be noted that while a substantial majority of investor-owned hospitals are freestanding the vast majority of investor-owned beds are owned by chains. In short, the chain investor-owned hospitals are considerably larger than the freestanding hospitals in the number of beds and thus in operating expenses.

All investor-owned corporations, regardless of whether they operate hospitals, are governed by the business corporation laws of the state in which they are incorporated. They must also register with other states in which they do business. Because of the relatively unobtrusive provisions of the business corporation laws of some states, e.g., Delaware, with respect to internal corporate operations, many corporations doing business in more than one state are incorporated under the laws of a state other than where they conduct the bulk of their business. 3 Corporations that only do business within one state, however, are more often than not incorporated only under that state's business corporation law.

There are certain basic attributes shared by all business corporations. All business corporations are ultimately governed by their shareholders, i.e., individuals or corporations who possess a proprietary interest in the assets and income of the corporation that is signified by the ownership of stock. The shareholders, as owners of the corporation, elect a board of directors, which is responsible for the conduct of the corporation.

The board of directors in turn employs various individuals who are responsible for the day-to-day operations of the corporation. These individuals are referred to as officers or agents of the corporation. In most cases, at least with respect to investor-owned companies, the officers of the corporation also are members of the board of directors. This is most frequently true of the chief executive officer of the corporation. Beyond this, it is difficult to identify any other general patterns of organization because the titles, functions, and relationships of the various elements of corporations differ from state to state as well as from corporation to corporation.

The purpose of most state corporate laws is to protect the rights of the shareholders in relation to the corporation's board or management. These laws set forth rules governing corporate elections, require the board to render periodic financial statements to the shareholders, and provide mechanisms by which shareholders who dissent from certain actions taken by the corporation can receive compensation for their shares in lieu of continuing their association with the corporation. There are few, if any, restrictions on the kinds of business that can be conducted by business corporations, aside from general prohibitions against conducting criminal activities. Thus, the stated-purpose clause of many investor-owned companies, including hospitals, generally permits the corporation to engage in "any lawful activities permitted to be conducted by corporations" in the particular state. This allows easy diversification of investor-owned corporations into both related and unrelated business.

The general and specific purposes of the corporation are outlined in the articles of incorporation or charter, the document filed with the state to obtain the state's recognition of the corporation's existence as a separate legal entity. More detailed rules governing the organization and operation of the corporation can be found in the bylaws of the corporation. Although state laws generally require that certain minimal information be included in the articles of incorporation, the corporation is usually free to fashion its bylaws in whatever way it sees fit.

In the case of hospitals, however, there are a number of additional regulatory and accreditation requirements pertaining to the content of the corporate bylaws that ultimately affect their organization, whether investor-owned or nonprofit. These include regulations promulgated by state departments of health or whatever state agency governs the conduct of hospitals. Such regulations traditionally dealt with "bricks and mortar" issues, such as safety standards and other public health concerns, but more recently they have begun to deal with the internal management of the hospital and to prescribe certain organizational requirements and restrictions. Likewise, the Joint Commission on Accreditation of Hospitals and the American Osteopathic Association, which together accredit almost all hospitals in the United States, have extensive standards pertaining to the internal organization and operation of the hospital board and management.4 Thus, both investor-owned and nonprofit hospitals are not as free to fashion some portions of their bylaws as other corporations may be.

In addition to general regulations under state corporate statutes, business corporations that make their shares available for purchase by the public are subject to federal regulation under the federal securities laws, such as the Securities Act of 19335 and the Securities Exchange Act of 1934.6 Corporations whose shares are available only to a limited number of shareholders and are not offered to the public are not subject to this regulation.

One of the major advantages of the chain holding company model for operating hospitals is that removing central management of the corporation from the local sites of the hospital allows major fiscal and operating decisions to be made free of local pressure, either from the community or from physicians. Thus, the local hospital is more likely to conform to the corporate fiscal plan with greater efficiency. In effect, local management has less discretion and is less likely to be manipulated by local community or physician interests through the board, because management is effectively employed and evaluated by the holding company. These are significant differences between the legal operation of the chain investor-owned hospital and the locally owned and operated nonprofit hospital.

The majority of hospitals (which represents the majority of hospital beds) are organized and operated as nonprofit corporations. They are subject to the nonprofit corporation laws of the states in which they are incorporated. Compared with business corporation laws, nonprofit corporation laws are far more varied through the country. Some general observations can nevertheless be made. There are two basic types of nonprofit corporations: membership and nonmembership.7

A membership corporation is more closely analogous to the investor-owned corporation in terms of its organization. A body of individuals known as the members is given the authority to elect a board of directors (or trustees as they are frequently called). In the case of a hospital the members may-include individuals from the local community, representatives of a religious group affiliated with the hospital, physicians on the medical staff, or even other corporations. The board is responsible for the conduct of the corporation. The board in turn employs officers and agents to run the day-to-day affairs of the corporation. These individuals are known as either management or administration of the corporation.

The very use of the term administration instead of the generic corporate term management denotes the tradition in the nonprofit hospital corporation of giving the administrator—the individual who is the equivalent of the chief executive officer in a business corporation—less authority than his business counterpart. This tradition is changing, and the nonprofit manager now has greater authority, in part as a result of the growth of chain investor-owned hospitals.

State nonprofit corporation laws usually grant some degree of protection to the rights of members with respect to actions taken by the board or corporate management, e.g., prohibiting the board from unilaterally adopting any bylaws, amendments, or fundamental corporate changes that would affect the rights of the members8 or requiring that the books and records of the corporation be open for inspection by the members9

In most states, however, nonprofit corporations do not have to be organized as membership organizations, and, even where they are, it is permissible to have the membership and the board of trustees com posed of the same individuals.10 Thus, nonprofit corporations can be governed by self-perpetuating boards answerable only to themselves (and to state law) with respect to the internal affairs of the corporation. Although it would seem that a board and management of a corporation without members would have a far freer hand than their investor-owned counterparts in operating the corporation, generally there is little practical difference. Shareholders in business corporations seldom care about or exercise their prerogatives to change or restrict managements, as long as profits continue at an expected rate.

Where members are present, the board and management may possess less freedom, depending on the environment in which the corporation finds itself. This is especially true in the health care field. For example, hospitals located in areas with a strong tradition of community involvement by means of membership in the corporation will often have boards and management that are reluctant to embark on aggressive new or nontraditional hospital ventures for fear of up setting some elements of the community, particularly the physicians. In such a situation the hospital corporation can become almost as highly politicized as a unit of local government. Other hospitals have corporate memberships composed completely or partially of the physicians on its medical staff.11 This places the board in the rather peculiar position of having to answer to the same group whose medical quality it is responsible for overseeing.12

Corporate membership bodies can also provide a vehicle for certain factions within the hospital to wrest control from boards or management that they are displeased with. In many instances, anyone can become a member of the corporation upon payment of token dues, often as little as $5.00 per year. Thus, a group that is interested or astute enough can gather a substantial following and attempt a coup.13 Some states even provide for derivative suits by members.14 Fortunately for boards and management, this threat is largely diminished by the usual inertia of the membership, and it can be further blunted by carefully crafted bylaws that provide for more stringent member ship requirements or that allow the board to approve new members or remove current ones.15

The courts generally have protected the rights of boards and management in such situations. For instance, in one case where a segment of the corporate membership of a hospital, during a dispute with the board, attempted to call a meeting on their own to remove the current board and elect a new one, an Illinois court invalidated that action and ruled in favor of the existing board, emphasizing that the hospital's by laws did not permit that action.16 The court went on to rule that members of nonprofit corporations have no constitutional right to elect or remove board members because, unlike shareholders in business corporations, they possess no property interest in the corporation.

In hospitals, perhaps more than other nonprofit institutions, it is essential that the board and management retain real control of the hospital. This is so not only because the nature and size of the business demand tight entrepreneurial control but also because various regulatory and accreditation bodies, as well as the courts, have placed the responsibility for running the hospital squarely on the shoulders of the board. For example, the Joint Commission on Accreditation of Hospitals requires that each hospital have "an organized governing body... that has overall responsibility for the conduct of the hospital .... "17 Likewise, the Conditions of Participation for the federal Medicare program require that each hospital receiving reimbursement from the program have "an effective governing body legally responsible for the conduct of the hospital as an institution." 18 Many state licensing regulations have similar statements.19 While revocation of license or accreditation for these reasons is rare, the threat is there and is perceived as real.

Most compelling, however, is the increasing number of judicial decisions in recent years holding that a hospital board is responsible for the quality of medical and hospital care rendered in the institution, even by nonemployees,20 as well as for the fiscal integrity of the corporation.21 If a hospital board is to fulfill its responsibilities in this area, it must exercise the ultimate authority within the corporation. In light of these realities, corporate bylaws that dilute the authority of the board, in favor of corporate members who may not be concerned with profit or the dynamic future of the corporation, are a threat to the well-being of the institution.

In most multihospital systems (both investor-owned and nonprofit) the authority of the board of each individual hospital within the sys tem is necessarily circumscribed to some degree by the reserved powers of the controlling entity of the system. Nevertheless, the individual hospital boards will still be held legally responsible for the conduct of their respective institutions. Thus, in order to avoid an increased potential for liability, enough discretionary power to deal with internal concerns, especially medical staff affairs and quality assurance, must be given to the individual boards.

There are, however, some multihospital systems (mostly investor-owned) in which the individual hospitals are not separately incorporated. Rather, one corporation with one board owns all the hospitals collectively. This kind of arrangement, while possessing some tax advantages, has some serious drawbacks. The single corporate board will be held legally responsible for the conduct of each individual hospital, even though it is not as close to the day-to-day operations of the hospital as a local board would be. Also, creditors and tort claim ants who are awarded judgments against one of the hospitals in the system can satisfy those judgments by attaching the assets of some or all of the other hospitals. This generally would not be possible if each hospital were separately incorporated.

Another factor that creates an important organizational distinction between investor-owned and nonprofit hospitals are the strictures imposed on the purposes for which nonprofit corporations can be organized and operated. First of all, almost all nonprofit corporation statutes require that the corporation be for a limited number of purposes, generally charitable, scientific, educational, benevolent, religious, etc.22 Second, and this is probably the most fundamental difference between investor-owned and nonprofit corporations, the income and assets of the nonprofit corporation are not permitted to inure to the benefit of any private individual.23

This does not mean the corporation's board and management must serve without pay. It simply means that no private individuals, including the board and members, can exercise "ownership rights"' in the corporation's assets as shareholders would with respect to the assets of a business corporation.24 Other provisions in nonprofit corporation statutes can require judicial supervision of the dissolution of nonprofit corporations.25 These statutes effectively prevent a whole range of entrepreneurial partnership arrangements that could bring equity capital into the corporation and that are routinely open to investor-owned hospitals.

Despite the fact that nonprofit corporations are subject to this restraint against private inurement, nonprofit corporations are not appendages of state or local governments. They are private institutions created pursuant to a statute but with a separate legal existence of their own. Therefore, it is incorrect to characterize their assets or operations as "public" assets or operations. Although those assets or operations may be devoted to a generally public or charitable purpose, and private individuals are prohibited from "profiting" from them, they are owned by and are the responsibility of a private nonprofit corporation.

As previously implied, the restraint against private inurement has been said to be a primary source of operational differences between investor-owned and nonprofit health care institutions. Some observers have concluded that the absence of a profit motive in nonprofit corporations leads managers of such institutions to seek "prestige" among their peers in lieu of monetary reward.26 This may channel energies, for good or bad, into expanding the physical plant or adding sophisticated technological equipment, without the requirement of profitability. This may be good for the availability of health care to the community but may be a risk to the long-term financial viability of the corporation. It has also been asserted that the professional beneficiaries of nonprofit institutions (in the case of hospitals, the medical staff) often fill the vacuum left by an absence of shareholder proprietors and dictate policies of the institution.27 This is especially true where the board or management fails to exercise proper leadership.

At least one study has concluded that nonprofit hospitals are less efficient than their investor-owned counterparts in the ratio of personnel to the occupancy rate.28 Other studies support the conclusion that managers in investor-owned hospitals perform better than those in nonprofit institutions because of the latter's lack of proprietary incentives.29 Current statistics seem to bear this out, although the data unfortunately are not controlled for the mix and severity of cases. In 1981 investor-owned institutions had a lower average length of stay (6.5 days to 7.8) and lower full-time equivalent personnel per 100 adjusted census (322 to 348) than nonprofit hospitals.30 And, while average daily expenses were slightly higher in investor-owned hospitals than in nonprofits ($299.02 compared with $285.61), labor costs were significantly lower in investor-owned hospitals than in non-profits ($140.32 to $164.01 per inpatient day).31

These figures, which are commonly viewed as indices of efficiency in the health care field, would seem to indicate a marked advantage associated with the investor-owned form of organization. However, they must be viewed in light of the fact that many investor-owned institutions tend to have a higher proportion of "paying" patients as opposed to those whose bills are paid by third-party programs, such as Medicare, that reimburse at or below actual costs and that nonprofit hospitals are more likely to be engaged in costly teaching or training programs--programs whose costs center in the nonprofit field but whose benefits accrue to all.

Some investor-owned hospitals (as well as some nonprofits) have chosen not to participate in Medicare or accept charity patients at all or to set quotas (stated or unstated) on the number of such patients who will be treated. This had led to charges that some investor-owned hospitals have been "dumping" Medicare, Medicaid, and charity patients on their nonprofit neighbors, especially in areas such as southern Florida.32 A larger percentage of Medicare patients, who because of age or type of illness, generally stay in a hospital longer and require more intensive nursing care, could explain, at least in part, the difference in "efficiency" figures between investor-owned and nonprofit hospitals. Thus, the meaning and explanation of reported differences between different types of hospitals is not clear, and more empirical research is warranted.

Where dumping of Medicare, Medicaid, or charity patients has allegedly taken place, the medical staffs of the nonprofit and investor-owned hospitals involved often consist of virtually the same physicians. This means that for one reason or another, the physicians have made a conscious decision to treat one segment of their patients in one hospital and others in another. Where the physicians own a proprietary interest in the investor-owned hospital, the reason behind their decision to admit only paying patients there is rather obvious. However, where the hospitals are all nonprofit, or where an investor-owned hospital chain is involved, the physician's actions may be dictated by policies adopted by the hospitals or by the expressed feeling of one of the hospitals that it has a "duty" to receive and care for all patients regardless of their ability to pay. Once again, too little empirical data are available to make a definitive analysis of the subject, but clear anecdotal examples exist.

To summarize, there are a number of significant differences in the way the law treats investor-owned and nonprofit hospitals with respect to their organization. While there also seem to be some statistical differences in the efficiency with which the two types of hospitals conduct their operations that favor the investor-owned form, it is not clear that these differences can be causally linked to the legal differences between the two forms except where the corporate decision making can be more ''objective'' when removed physically and organizationally from the local scene.