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GOING FOR-PROFIT – THE EFFECT ON NOT-FOR-PROFIT HOSPITAL FINANCIAL POSITION AND OPERATIONAL FACTORS Janet F. Phillips Sc.D, CPA Southern Connecticut State University ABSTRACT While for-profit hospital ownership has always been a hotly debated topic, the benefits and detriments of this form of ownership have been revisited. Increased fascination with this topic is in reply to the conversion in the mid to early 1990’s of some 50 not-for-profit hospitals to for-profit status through acquisition; 22 of which recently reverted back to not-for-profit status. As a result, this study examines the effect of for-profit ownership status on financial and operating performance of hospitals. Not-for-profit hospitals acquired by for-profit hospital chains provide a unique opportunity to compare the same hospital under for-profit control. Pre-acquisition, not-for-profit results of operations were compared to post-acquisition, for-profit performance. Cash flow, profitability, liquidity and capital structure ratios, depicted financial performance of the hospitals. While pricing and cost indicators, activity ratios and volume, length of stay and payer mix data measured operational performance. To consider the effect of external environmental changes in the not-for-profit hospital industry, post- acquisition results were compared to results of a group of hospitals of similar size and geographic location – “other hospitals”. Generally, results suggest for-profit owners increase prices, improve the condition of the physical plant of the hospital and increase efficiency by reducing average length of stay and wages. Increases noted in capital expenditures and prices after acquisition were validated as very significant as these changes were in excess of those experienced in “other hospitals” during the post acquisition time frame. This suggests that the changes were attributable to going for-profit and not an increase experienced across the hospital industry. Increases in case mix indices suggest for-profit hospitals are more aggressive in reporting the illness they treat, these increases were noted to be in excess of “other hospitals”, as well. Results of payer mix testing suggest more Medicaid patients were treated than “other hospitals”. However, no increase was noted between Medicare and Medicaid patients served between not-for-profit versus for- profit operations. These operating strategies do not, however, appear to translate into immediately improved short-term financial performance. No significant favorable changes were noted in profitability, cash flow, liquidity and capital structure after the hospitals were converted to for-profit. Nor were any of these measures of financial performance found superior to those of “other hospitals” during the post-acquisition time frame. In fact, reductions in length of stay and wage levels may actually detract from quality as reflected in occupancy rates which were significantly lower than “other hospitals” post-acquisition.
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