Changing Fortunes, Hospital Behaviors, and Ownership Forms

Abstract

The U.S. hospital industry is unusual in that for-profit, private nonprofit, and public entities compete side-by-side. We evaluate alternate theories of the nonprofit form employing three approaches: an historical review, a case study, and an econometric analysis. The metaphor of an ecosystem, bringing to mind disparate organizations in coadapting relationships, helps explain the historical ebbs and flows of ownership structures in the U.S. hospital industry. The entry and exit of for-profit hospitals appears consistent with dynamic efficiency in resource allocation. Our econometric analysis focuses on hospital behaviors in California and Florida during 1982-1990, a period corresponding to a shift in the reimbursement system from cost-pass-through to fixed price. The reimbursement change does not lead to differences in the mix of services provided by different ownership forms. While for-profits reduce their level of uncompensated care, their payer mix of Medicare, Medicaid and private patients continues to be similar to that of nonprofit non-teaching hospitals. No absolute cost advantages to for-profits emerge, not even relative success in cost containment by large-chain for-profits. The main response of large-chain for-profits to reimbursement pressures has been reorganizations.