Do Not-for-Profit Hospitals and Insurers Generate “Profits”?

All firms require capital to get started. Not-for-profit hospitals relied heavily on charitable capital donations from members of the community to finance their development. These charitable donors did not seek a financial return on their donation. Instead, their “return” was to ensure that their community would have a hospital that improved the health of those it served. (The “return” to some donors, similar to donors in the fields of arts and education, is a degree of immortality by having their names inscribed on a specific capital project.)

Not-for-profit Blue Cross plans were begun by not-for-profit hospitals in their region that provided the initial capital. These hospitals controlled Blue Cross plans until the 1980s. In return for their capital, Blue Cross plans sold a type of hospital insurance designed to advance the self-interest of those hospitals.5

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Do Not-for-Profit Hospitals and Insurers Generate “Profits”?
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A not-for-profit company is supposed to provide services for the benefit of the general public, and it has restrictions on how surpluses (net income or earnings) can be distributed. Further, a not-for-profit company does not have stockholders, and its primary motive is not to increase its profit.

Legal distinctions between for-profit and not-for-profit firms are less important than any behavioral differences between the two types of orga- nizations. Currently, many not-for-profit hospitals and insurers exist. They have expanded in size, developed new services, bought physician practices, and gained excellent reputations. How have they been able to achieve all this without earning profits? Where did the capital originate for these investments?