An Empirical Investigation of Joint Ventures Between For-Profit and Tax-Exempt Nonprofit Hospitals

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Virginia Tech

This dissertation examines debt ratios, profitability, and commercial activity of the following hospitals: (i) for-profit hospitals [FP hospitals], (ii) nonprofit hospitals engaging in joint ventures [JV NP hospitals], and (iii) nonprofit hospitals that do not engage in joint ventures [Non-JV NP hospitals]. Financial variables are measured using Form 990 tax return data of nonprofit hospitals and audited financial statements of for-profit hospitals.

The purpose of the study is to compare: (1) JV NP hospitals versus FP hospitals and (2) JV NP hospitals versus Non-JV NP hospitals. Potential similarities between FP and JV NP hospitals may indicate nonprofit partners are becoming indistinguishable from for-profit entities, which may further call into question the applicability of tax-exempt status for these nonprofit hospitals.

Results indicate significant differences exist in debt ratios between FP and JV NP hospitals. A lack of significant differences in profitability lends support to the argument that JV NP hospitals may exhibit similarities in financial characteristics to for-profit hospitals.

Regarding comparisons within the nonprofit sector, significant differences were found in profitability and unrelated business income percentages. Differences in debt ratios were not found between the two groups - which fail to support Internal Revenue Service (IRS) arguments that there is something 'special' about JV NP hospitals. JV NP hospitals reported lower profitability on all measures than Non-JV NP hospitals. Findings of lower profitability are consistent with arguments that JV NP hospitals are attempting to improve their financial condition by partnering with for-profit hospitals. Significant differences were not found in contributions received as a percentage of total revenue between the nonprofit hospital groups.

This dissertation contributes to existing literature that compares nonprofit and for-profit hospitals through reliance on tax return data of nonprofit hospitals. Tax returns serve as a primary source for the public and IRS to scrutinize a nonprofit organization's financial operations. The IRS uses tax return data to evaluate a hospital's activities, measure its charitable activities and scrutinize the organizations' tax-exempt status. Investigating these differences using actual tax return data provides support to the argument that nonprofit hospitals engaging in joint ventures exhibit similarities to for-profit hospitals.

For-Profit, Joint Venture, Hospitals, Nonprofit