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Hospital Ownership

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

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  1. Hospital Ownership Economics 737.01 9/28/10

  2. Outline • I. Introduction • II. Theoretical Models • III. Empirical Evidence

  3. 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

  4. 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

  5. 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

  6. 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)

  7. 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?

  8. 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

  9. 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.

  10. 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

  11. 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

  12. 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?

  13. 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)?

  14. 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.

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