Business entities are incorporated (licensed to operate) by states. Typically, this process is regulated through each state’s Attorney General’s office. At the time of incorporation, a business must select whether it will function in (a) a for-profit model, or (b) a not-for-profit model. Any business that has shareholders or investor owners, regardless of the form of incorporation – sole proprietorship, S-Corporation, C-Corporation, LLC, etc. – must operate in a for-profit model. Simply put, this requires them to abide by the tax code of their state, the federal government, and perhaps the municipality in which they are incorporated. In its simplest terms, for-profit business entities PAY TAXES and may distribute earnings (profits) as DIVIDENDS to the shareholders or owners.
Not-for-profit businesses do not issue stock shares nor distribute their surplus funds (profits) to owners or shareholders. In the United States, most hospitals and healthcare providers had their roots in religious or eleemosynary organizations that were perceived to be making a public contribution to the welfare of the citizens whom they serve. This reduced or eliminated the need for government to provide such services. That is why they qualified for tax exemption. In the United States, to be exempt from federal income taxes the organization must meet the requirements set forth by the Internal Revenue Service.
The Federation of American Hospitals (FAH) was organized in 1966 as the national “advocacy” organization for for-profit/investor-owned hospitals and related entities. Since that time, it has become one of Washington, D.C.’s most respected advocacy organizations.
A similar role is played by the American Hospital Association on behalf of not-for-profit (also known as “voluntary”) hospitals and related entities. In the United States, For-Profit (Proprietary) hospitals comprise approximately 20% of all registered hospitals, while Not-for-Profit (Voluntary) and other government facilities make up approximately 80%.
In communities (marketplaces) in which for-profit and not-for-profit organizations compete, there is often tension over the issue of tax exemption. For-Profit entities feel that their Not-for-Profit competitors have an unfair advantage because they can offer services at prices that do not reflect the need for usual and customary profit margins. For example, that tension exists in the Utah/Idaho healthcare market, where the two dominant players are Intermountain Healthcare (IHC) and HCA, doing business as Mountain Star Healthcare (one of HCA’s business divisions that covers Alaska, Utah, and Idaho).