Investor-owned businesses have two sources of equity financing: retained earnings and new stock sales. Not-for-profit businesses can and do retain earnings, but they do not have access to the equity markets that is, they cannot sell common stock to raise equity capital.
Not-for-profit firms can, however, raise equity capital through government grants and charitable contributions. Federal, state, and local governments are concerned about the provision of healthcare services to the general population.
Therefore, these public entities often make grants to not-for-profit providers to help offset the costs of services rendered to patients who cannot pay for those services. Sometimes these grants are nonspecific, but often they are to provide specific services such as neonatal intensive care to needy infants.
As for charitable contributions, individuals, as well as companies, are motivated to contribute to not-for-profit health services organizations for a variety of reasons, including concern for the well-being of others, the recognition that often accompanies large contributions, and tax deductibility. Because only contributions to not-for-profit firms are tax deductible, this source of funding is, for all practical purposes, not available to investor-owned health services organizations.
Although charitable contributions are not a substitute for profit retentions, charitable contributions can be a significant source of fund capital.
Most not-for-profit hospitals received their initial, start-up equity capital from religious, educational, or governmental entities, and today some hospitals continue to receive funding from these sources. However, since the 1970s, these sources have provided a much smaller proportion of hospital funding, forcing not-for-profit hospitals to rely more on profits and outside contributions.
Additionally, state and local governments, which are also facing significant financial pressures, are finding it more and more difficult to fund grants to healthcare providers.
