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Hospital Ownership. Economics 737.01 9/28 /10. Outline. I. Introduction II. Theoretical Models III. Empirical Evidence. I. Introduction. Organization ownership forms For-profit: distribute profits to equity holders

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hospital ownership

Hospital Ownership

Economics 737.01


  • I. Introduction
  • II. Theoretical Models
  • III. Empirical Evidence
i introduction
I. Introduction
  • Organization ownership forms
    • For-profit: distribute profits to equity holders
    • Not-for-profit: profits cannot be distributed to individuals; must be re-invested into the organization
      • Exempt from corporate income and property taxes
      • Eligible for private donations
      • Easier access to tax-exempt bonds
      • Can’t raise money by selling stock
      • Selection of board members fuzzier than for-profit
i introduction4
I. Introduction
  • Organization ownership forms
    • Public
      • Also tax exempt
      • Profits go to government
      • Government appoints board and monitors output
      • Hospitals have less control over compensation and employment practices
      • Generally can’t turn away patients even if they can’t pay
i introduction5
I. Introduction
  • For-profit hospitals are rare in developed countries:
    • US: 60% non-profit, 28% public, 12% for-profit
    • Canada: 98% public
    • France: 65% public, 16% non-profit, 19% for-profit
    • Germany: about 33% each
    • Netherlands: for-profit prohibited
    • Switzerland: 46% public, 32% non-profit, 22% for-profit
    • UK: mostly public
i introduction6
I. Introduction
  • Why are most US hospitals non-profit?
    • May mitigate incentives to abuse market power arising from difficulty measuring quality of care
    • Fill unmet demand for public goods
      • Do hospitals provide public goods? Not obvious that they do; maybe enhance community spirit or help limit spread of diseases.
    • Willing donors
    • Inertia: difficult to convert
    • Result of bargaining power doctors have since they are not employees
    • Non-profits dominant in sectors with zero or negative profits (Lakdawalla and Philipson, 1998)
ii theoretical models
II. Theoretical Models
  • In Zweifel and Breyer (1997), hospital behavior is the result of game with four distinct players:
    • Physicians (who are not employees)
    • Employees
    • Owners (community at large in non-profit?)
    • Managers (probably board too)
    • How would hospital behavior be different depending on which group has the power?
ii theoretical models8
II. Theoretical Models
  • Newhouse (1970): model of non-profit hospitals
    • Where X=output, Y=quality, ∏=profit
    • Not pure profit maximizer, also direct utility from quantity and quality because of prestige
    • Constraints:
    • Where P=price, C=cost, M=demand shifter, N=cost shifter, K=capital, and L=labor
    • Increased demand => increased quality and quantity
    • Increased cost => decreased quality and quantity
ii theoretical models9
II. Theoretical Models
  • Pauly and Redisch (1973): non-profit hospital as physician’s cooperative
    • Output, capital, and number of doctors set to maximize income per doctor.
    • Increase in demand could have counterinutitive effects, such as an increase in price, decrease in output, and smaller staff size.
iii empirical evidence
III. Empirical Evidence
  • Costs (Efficiency)
    • Non-profit hospitals may be wasteful
    • For-profit hospitals may push unnecessary services
    • Efficiency difficult to measure: does a higher cost per service reflect inefficiency or better quality?
    • No clear consensus reached in literature
iii empirical evidence11
III. Empirical Evidence
  • Quality
    • Keeler et al (1992)
      • Peer reviews of appropriateness of care in 14,000 medical records
      • Non-profit ≈ for-profit > public
    • Conflicting results in literature using mortality as measure of quality
    • Sloan et al. (1998a, 1998b) and Sloan and Taylor (1999)
      • Survival, functional status, cognitive status, and living arrangements of elderly patients following care for hip fracture, stroke, heart disease, and congestive heart failure
      • Teaching > non-teaching non-profit ≈ for-profit > public
iii empirical evidence12
III. Empirical Evidence
  • Cost-shifting: increasing price to private payers when fees paid by public insurance are cut
    • Conditions
      • Hospital has market power in private market
      • Hospital was not fully exploiting this power initially
    • More likely with non-profits than for-profits
    • Dranove (1988): $1 decrease in hospital profits => $0.51 increase in price per private admission
    • Morrisey (1994): evidence for cost-shifting mostly based on old data; there is also evidence against it
    • Why might the extent of cost-shifting have been reduced over time?
iii empirical evidence13
III. Empirical Evidence
  • Uncompensated care: includes both charity care (given when payment not expected) and bad debt (care where payment was expected but not received)
    • Giving charity care increases prestige but hurts profits
    • Theoretically more likely in non-profits than for-profits
    • In 1994, uncompensated care 4.5% of revenue in non-profits and 4% in for-profits (US PPAC, 1996)
    • Less uncompensated care if more competing hospitals are for-profit (Frank et al, 1990)
    • Is the relationship just because for-profit hospitals are located where better insured people live (Norton and Staiger, 1994)?
iii empirical evidence14
III. Empirical Evidence
  • Profits
    • Non-profits actually seem more profitable than for-profits (though not clear this is causal)
    • Profits of for-profits more variable
  • Competition
    • It appears additional competition causes non-profit hospitals to behave more like for-profits.
  • Diffusion of technology
    • There don’t seem to be significant differences in adoption between for-profit and non-profit.