Chapter 21 Not-for-profit ownership and hospital behavior

The for-profit hospital is in the minority numerically in all developed countries. Although the for-profits' market share has been quite stable for decades, for-profit chains have grown in share and influence in the United States. By contrast, for-profit chains have made few inroads in other countries. The literature on hospital ownership addresses three fundamental questions. First, why do private not-for-profit organizations dominate the hospital industry? Second, how do private not-for-profits differ from for-profits in their behavior? Third, is the private not-for-profit form more efficient in this industry? The main difference between for-profit and private not-for-profit organizations is in the distribution of accounting profit. The latter do not distribute profits to equity holders and enjoy some competitive advantages, including tax exemptions and the ability to receive private donations. Various reasons for why the not-for-profit form is dominant are explored. Reasons involve: transactions costs of various ownership forms; fiduciary relationships between patients and providers; public goods; implicit and explicit subsidies; inertia; cartelization; and lack of profit opportunities. The review concludes that there is merit in an number of explanations, but no single explanation works perfectly. Certainly the transactions cost of various ownership forms must provide a partial explanation for observed patterns of hospital ownership. There is a rich empirical literature on hospital behavior. This chapter discusses comparative evidence by hospital ownership form on hospital cost, profitability, pricing and cost-shifting, uncompensated care, diffusion of technology, quality of care, and hospital capital funds and investment. In recent years, changes in hospital ownership have been common in the United States. Changes have occurred in all directions — from private not-for-profit to for-profit and the reverse, for example. Comparing hospital behavior before and after the conversion, the fact that a hospital converted seems to be more important than the type of ownership change that occurred. As competition among hospitals increases, differences in behavior among hospitals with different ownership forms should narrow. Privately owned hospitals in the U.S. were more alike than different. Private not-for-profit hospitals will have less latitude than previously to produce outputs they deem to be socially worthy. The chapter ends with the author's agenda for future research.