Non-profits operate as tax-exempt charities and are ethically bound to serve the public good. All funds are diverted back into the organization, to further its stated goals.
One obvious problem with using a non-for-profit structure is that it impinges upon the organizations ability to sell shares to raise revenue. On the other hand, donors are encouraged to make contributions to not-for-profits because their donations are tax exempt. A corporation, in contrast, is taxed as a fictional person under the law. A not-for-profit enterprise has the freedom to pursue a wider range of goals, such as providing heath insurance to consumers who might be high risk yet lack coverage. This may not be strictly profitable, but may be part of the organizations charitable mission.
However, because cost efficiency rather than increasing the numbers of covered patients is the stated goal of this enterprise, efficiency may be better served by a for-profit structure. According to one analyst, “investor-owned, for-profit insurersare more efficient. The truth is they may be more selective in the patients they choose to insure, leaving out less healthy people who have greater needs for care. Basically, out of the health-care dollar they first take their profit and their own administrative costs and tax obligations.
Then, the balance — they call it the medical loss ratio — is whats left to pay for health care. With some publicly traded HMOs, as little as 75 cents on the dollar is left over. By contrast, the nonprofit HMO pays no tax, returns no profit to investors and thus has more of the Medicare dollar to apply to health care, generally between 85 and 90 cents. At least one nonprofit HMO labels that piece its medical cost ratio, an important symbol that their primary interest is in what is available for health care rather than what is lost from their profit” (Rabkin 1999).
Hayden, Eric. (2005, March). Non-profit hospitals face structural as well as financial challenges:
Lessons from Massachusetts. Financial Services Forum. College of Management.
University of Massachusetts Boston. March 2005. Working Paper 1003. Retrieved
November 1, 2010 at http://www.management.umb.edu/faculty/workingpaper/hayden_eric/Hayden_Working_
Rabkin, Mitchell. (1999). “Squaring off.” The Wall Street Journal. Retrieved November 1, 2010