Profit vs. Nonprofit: Does Either Have a Competitive Edge?

By Mangan, Doreen | Medical Economics, April 27, 1998 | Go to article overview

Profit vs. Nonprofit: Does Either Have a Competitive Edge?


Mangan, Doreen, Medical Economics


Here's a look at how both types of practice settings fare in the marketplace-and at how doctors do in each environment.

When nonprofit hospitals in Chicago began buying physician groups more than five years ago, thoracic surgeon Raj Lal sensed his two-doctor practice in suburban Lombard would suffer.

The groups' new tax-exempt status would free up dollars and allow them to hire more doctors, including some fresh from residency. Lal assumed that those doctors would refer patients to people they knew, or to where the hospital told them to-cutting him out of the picture.

Alarmed at what he saw as the nonprofits' competitive edge, Lal asked the American Medical Association to propose legislation to protect "fair-market opportunities" for physicians in private practice. That was in 1995.

The AMA did a study, and found no clear competitive advantage for tax-exempt over nonexempt groups. Lal's experience, however, suggests otherwise. His practice revenue has sunk 40 percent over the last five years. Declining reimbursements were a factor, but so was competition from hospital-owned. groups.

While Lal is convinced that groups in nonprofit settings have the upper hand, some physicians disagree. "The exemption isn't the advantage people make it out to be," says FP Toby Cole, executive medical director for Colorado Permanente Medical Group in Denver. "We don't pay corporate tax, but we give away a lot. We teach residents, we take care of the uninsured, we fund community health programs. In addition, the for-profit groups can raise cash from stock offerings, and can create salary schemes to give their doctors greater incentives than we can."

More important, most doctors in a for-profit practice own that business and have complete decision-making autonomy. Doctors in nonprofit settings have no stake in the practice, and major decisions must be okayed by a board of directors.

Joan Roediger, an attorney with The Health Care Group, a practice management consulting firm in Plymouth Meeting, Pa., lists another for-profit ace in the hole: "Since there's no partnership track in a nonprofit setting, you'll probably make less money in the long run."

The downside of being a nonprofit

Tax-exempt status does, indeed, exact a price: Nonprofits must march to the beat of the IRS drum when it comes to compensation and other money issues.

A nonprofit hospital may not pay dividends or split surplus income with physicians in the groups it owns or runs. It seldom bases income on production, because physician compensation may not exceed the fairmarket rate. Nor can it pay more than fairmarket value for the practices it purchases. A hospital breaking these rules risks losing its tax exemption.

In most cases, this forced adherence to IRS rules gives hospitals an excuse to tie physician compensation to stringent criteria.

Many hospitals have minimal collection benchmarks that must be met before doctors' salaries can go up. "And salaries can come down if those benchmarks aren't reached," notes attorney Melania Mesuraca, also with The Health Care Group. So even if, say, a hospital's collection system is inefficient, the physicians' incomes could dip. One of Mesuraca's clients had to sign a contract that stipulated a drop in salary if Medicare reimbursement rates went down. Another had to agree to work additional hours if she didn't hit revenue targets.

Private, for-profit practices wouldn't take these tacks, Mesuraca says, because "it would scare away prospective recruits." Moreover, doctors on productivity-based salaries in private practice can make up any revenue shortfall by working longer hours and seeing more patients. Few doctors in hospital-owned settings have such flexibility because incentives rarely account for more than a small part of their salaries.

So it's hardly a surprise that doctors in the nonprofit sector earn less. The median earnings and benefits package for all physicians in 1996 was $173,866, compared with $200,141 in non-hospital-owned groups, according to a Medical Group Management Association study. …

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