Elsevier

Journal of Health Economics

Volume 28, Issue 5, September 2009, Pages 924-937
Journal of Health Economics

Hospital ownership and medical services: Market mix, spillover effects, and nonprofit objectives

https://doi.org/10.1016/j.jhealeco.2009.06.008Get rights and content

Abstract

Hospitals operate in markets with varied demographic, competitive, and ownership characteristics, yet research on ownership tends to examine hospitals in isolation. Here we examine three hospital ownership types – nonprofit, for-profit, and government – and their spillover effects. We estimate the effects of for-profit market share in two ways, on the provision of medical services and on operating margins at the three types of hospitals. We find that nonprofit hospitals’ medical service provision systematically varies by market mix. We find no significant effect of market mix on the operating margins of nonprofit hospitals, but find that for-profit hospitals have higher margins in markets with more for-profits. These results fit best with theories in which hospitals maximize their own output.

Introduction

Research on hospital ownership has typically considered hospitals in isolation. Yet hospitals operate in markets with varied demographic, competitive, and ownership characteristics. Here we investigate the relationship between medical service provision and ownership considering not only each hospital's corporate form but also its market characteristics, including the mix of nonprofit, for-profit, and government hospital ownership in the market.

Our main goal in this article is empirical, to estimate the direct and spillover effects of ownership structure on medical services and profit margins. We also offer a new empirical measure of hospital markets and address some of the endogeneity concerns regarding hospital location that make studying ownership difficult. In addition, we hope to contribute to a decades-old debate regarding theories of the nonprofit firm, both by considering how our results help differentiate among extant theories and by producing facts to inform future theorizing.

We examine ownership and market mix in two ways. First, we test whether medical service provision by nonprofit, government, and for-profit hospitals varies with for-profit market share. Investigating service offerings is particularly useful for understanding ownership because, in a highly regulated industry in which managers are constrained in their attempts to maximize profits (e.g., it is difficult and sometimes illegal to turn away low-paying patients), managers have some freedom to open or close a service to increase profits. This may explain why many researchers find little difference among ownership types along many dimensions (Sloan, 2000), but find large differences where administrators can influence profitability (Horwitz, 2007, Schlesinger and Gray, 2006). Second, we test whether hospital operating margins depend on the interaction between ownership and market mix.

We find that medical service provision systematically varies both by firm type and the share of for-profit hospitals within markets. Nonprofits in markets with high concentrations of for-profits are more likely to offer relatively profitable services, and less likely to offer relatively unprofitable services, than nonprofits in markets with fewer for-profits. In addition, nonprofits in markets with high for-profit market share are more likely than other nonprofits to offer post-acute services, such as home health care, when government reimbursement policies make them relatively profitable and less likely to offer them when profit-making opportunities are low. Government hospitals demonstrate a similar, although considerably weaker, pattern. Among for-profit hospitals, we find no systematic, significant relationship between service provision and for-profit market share. Further, we find no measurable effect of market mix on nonprofit hospital profit margins. However, for-profits show higher profit margins in high for-profit markets than those in low for-profit markets.

Based on an informal discussion of nonprofit theories, we conclude that our medical services results are most consistent with either models in which nonprofits maximize their own output (Baumol and Bowen, 1965, Newhouse, 1970) or some nonprofits are output maximizing (Hirth, 1999). Our finding that increased for-profit market share (and decreased nonprofit share) has a positive effect on for-profit hospitals’ operating margins is also consistent with the model that nonprofits maximize output, although we cannot rule out other models in which some nonprofits maximize output and others do not.

Section snippets

Previous research

Slightly fewer than two-thirds of urban, general medical and surgical hospitals are nonprofit; for-profit and government hospitals make up roughly equal shares of the remainder.1 Despite active hospital market consolidation during the 1990s (Gaynor and Vogt, 2003), ownership shares have remained remarkably

Data

Data on hospital characteristics are from the American Hospital Association's Annual Surveys of Hospitals 1988–2005 (AHA). We include all U.S., non-federal general medical and surgical hospitals within metropolitan statistical areas (MSAs), and examine every acute and post-acute medical service reported in the surveys (Table 2).

In addition to being self-reported, the AHA data have several limitations. First, the survey format changed slightly over the years. From 1988–1993, it asked hospitals

Medical services results

Here we present findings from the basic specification (i.e., using the distance-weighted market measure) for three representative services. These patterns are quite strongly confirmed by the results for the other services. We summarize all the service results in Table 2 (for full results, see Horwitz and Nichols, 2007).

Nonprofit hospitals are generally more likely to offer profitable services in high than low for-profit markets. Although this can most easily be seen in Fig. 1, the regression

Implications for theory

Our main empirical result concerning the interaction between ownership, market mix, and service provision – that service provision varies both by a hospital's ownership and by the ownership mix in the market – is most consistent with models of the nonprofit firm suggesting that nonprofits maximize their own output. First, if nonprofits were maximizing market output as in the Weisbrod model, we would expect them to compensate for deficiencies in service provision by neighboring for-profits.

Conclusions

We identify a strong and systematic relationship among hospital ownership, ownership mix in the market, and medical service provision. Nonprofit hospitals located in markets with high for-profit penetration are more likely to offer relatively profitable services than those in low for-profit penetration markets. With the exception of only one tested service (burn care), nonprofits are less likely to offer every unprofitable service in high compared to low for-profit markets. Perhaps the most

Acknowledgements

This research was funded by a grant from the Robert Wood Johnson Foundation's Changes in Health Care Financing and Organization Initiative. We thank David Cutler, Carole Gresenz, Henry Hansmann, James Hines, Joseph Newhouse, Edward Parson, Marit Rehavi, Jonathan Skinner, and two anonymous reviewers for comments. We thank participants in workshops at AcademyHealth, NBER, University of Michigan (School of Public Health, Law School, and Department of Economics), Cornell Law School Junior Empirical

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