The Profits of Not-for-Profit Hospitals

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Abstract
This paper explores the profits of not-for-profit (NFP) hospitals and identifies the factors that determine whether such profits are adequate. A model which relates hospital charges to surpluses is used to derive NFP surplus from gross patient charges and operating costs. This is done to identify the items contributing to surpluses and to explore the dispersion of NFP surpluses. We first discuss why the literature is relatively silent on NFP profitability. We then present the model and use Tennessee hospital data to identify how its components vary by hospital type and through time. The dispersion of surpluses among NFPs is then examined. We next propose three rate of return measures of profitability and use these to relate NFP profits to select characteristics of hospitals and their environments. Several alternative profit levels of NFP are discussed, and the factors that are relevant to the issue of determining the adequate level of profit are identified. The paper ends with a plea for better data on NFP profits.