Chapter 4: Health Care Systems and Institutions

1. Chapter 4: Health Care Systems and Institutions

2. Not-for-profit (NFP) Management • NFPs a large presence in the health care sector. • Blue Cross Blue Shield • 70% of all hospital beds controlled by NFPs • Distinctive features of NFPs vs. FPs • Initial Capital Source donations vs. revenue from stock issue • Use of profits not distributable as cash dividend • Firm sale or liquidation proceeds not distributable to “owners/managers” • Taxes exempt from certain taxes

3. Imperfect Information. • Consumers have less info than providers vulnerable • Prefer providers whose bottom line isn’t profits Why do NFPs exist? • Equity/Altruism • communities want health care for the poor • Externalities • FP’s don’t take into account full societal benefits for health care. e.g. infectious diseases

4. Why do NFPs exist? (cont.) • Why NFP health care as opposed to government provided health care? • Consumer needs are heterogeneous. e.g. religious affiliated hospitals children’s hospitals nursing homes other ancillary providers

5. Incentives of NFP providers • Utility maximization vs. profit maximization. Who’s utility? • Managers • Board of Trustees/Board of Directors • Physicians • Community • Possible Utility Function : Utility = U(Quantity, Quality)

6. Physicians and NFP Providers • Physicians make the production decisions in hospitals. • Assume Physicians maximize their income. • Physicians will want hospital resources that help them maximize their patient load. e.g. beds, staff, diagnostic equipment. • Physicians’ interests more in line with NFP managers.

7. Empirical Evidence on Nonprofits • Little or no difference in efficiency (costs) between for-profits & nonprofits. • Prices higher in for-profit hospitals • But nonprofits enjoy tax advantages and charitable contributions. • NP hospitals generate more community benefits than FP’s. • Monetary value of benefits exceeds subsidy received through tax-exempt status.

8. Nuns’ Zeal for Profits Shapes Hospital Chain, Wins Wall Street Fans ‘No Margin, No Mission “With 49 hospitals in 12 states and nearly $6b in annual revenue, Daughters [of Charity] ranks among the top 5 hospital systems in the nation.” “…their cash and investments have ballooned to about $2b, believed to be one of the largest reserves of any nonprofit hospital system in the country.” “Daughters now gets 60% of its income from its investment portfolio” WSJ 1/7/98

9. ‘Daughters of Currency’?? “Though Daughters spends about 86¢ on charity care and community work for every $1 of profit…’we don’t say we’ll take care of the poor until we run out of money.’ “One half of my brain is what’s the right thing to do; one half is a clinking cash register.” “The biggest savings, however, have come from selling unprofitable hospitals.” WSJ 1/7/98

10. Nonprofit to For-Profit Conversions • 34 hospital conversions in 1994, 59 in 1995. • BCBS plans are converting to FP status. • 1981 - 82% of HMOs were nonprofit. • 1995 - 29% “ “ “ “ Claxton et al., Health Affairs 1997

11. Nonprofit to For-Profit Conversions • Conversions provide NFPs with access to capital. • Well-established NFPs are an attractive acquisition for FP’s. Claxton et al., Health Affairs 1997

12. Entrepreneurs Look to Profit on Nonprofit Hospitals WSJ 2/2/98

13. Will NFPs survive increasing competition? • Although NFP managers may not maximize profits, have an incentive to produce as cheaply as possible. Conditions for survival • some degree of market power • consumers insensitive to price increase • government tax exemption • If degree of price competition intensifies, behavioral differences between NFPs and FPs may diminish.