Let's do the numbers

Julie Creswell and Reed Abelson offer a story in the New York Times about the HCA for-profit hospital system, noting "A giant hospital chain is blazing a profit trail."  The HCA story and similar ones about other hospital chains financed by private equity force us to consider how a such firms can achieve a return on equity that satisfies investors.

The answer is that they cannot, if we think about running the business on a long-term basis.  What makes it work is extracting cash and the exit strategy, the heart and soul of private equity.

As Warren Buffett might say, let's keep this simple.  A for-profit hospital system has the following disadvantages vis-a-vis a non-profit hospital system:  (1) Its finances are a mixture of equity and taxable debt, both of which are more expensive than the nontaxable debt of a non-profit; (2) it pays taxes--federal and state income tax, property tax, and sales tax--on which the non-profit is exempt; and (3) it is an unattractive vehicle for charitable donations, compared to the tax-advantages offered donors of non-profits.