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Does the Profit Motive Make Jack Nimble? Ownership Form and the Evolution of the U.S. Hospital Industry

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  • Sujoy Chakravarty
  • Martin Gaynor
  • Steven Klepper
  • William B. Vogt

Abstract

We examine the evolving structure of the U.S. hospital industry since 1970, focusing on how ownership form influences entry and exit behavior. We develop theoretical predictions based on the model of Lakdawalla and Philipson, in which for-profit and not-for-profit hospitals differ regarding their objectives and costs of capital. The model predicts for-profits would be quicker to enter and exit than not-for-profits in response to changing market conditions. We test this hypothesis using data for all U.S. hospitals from 1984 through 2000. Examining annual and regional entry and exit rates, for-profit hospitals consistently have higher entry and exit rates than not-for-profits. Econometric modeling of entry and exit rates yields similar patterns. Estimates of an ordered probit model of entry indicate that entry is more responsive to demand changes for for-profit than not-for-profit hospitals. Estimates of a discrete hazard model for exit similarly indicate that negative demand shifts increase the probability of exit more for for-profits than not-for-profits. Finally, membership in a hospital chain significantly decreases the probability of exit for for-profits, but not not-for-profits.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11705.

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Date of creation: Oct 2005
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Publication status: published as Sujoy Chakravarty & Martin Gaynor & Steven Klepper & William B. Vogt, 2006. "Does the profit motive make Jack nimble? Ownership form and the evolution of the US hospital industry," Health Economics, John Wiley & Sons, Ltd., vol. 15(4), pages 345-361.
Handle: RePEc:nbr:nberwo:11705

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  1. Mark Duggan, 2000. "Hospital Ownership and Public Medical Spending," NBER Working Papers 7789, National Bureau of Economic Research, Inc.
  2. Gaynor, Martin & Vogt, William B, 2003. " Competition among Hospitals," RAND Journal of Economics, The RAND Corporation, vol. 34(4), pages 764-85, Winter.
  3. Lynk, William J, 1995. "Nonprofit Hospital Mergers and the Exercise of Market Power," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 38(2), pages 437-61, October.
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  5. Mahmud Hassan & Gerard Wedig & Michael Morrisey, 2000. "Charity Care by Non-profit Hospitals: The Price of Tax-exempt Debt," International Journal of the Economics of Business, Taylor & Francis Journals, Taylor & Francis Journals, vol. 7(1), pages 47-62.
  6. Fred Goldman & Michael Grossman & Susan W. Nesbitt & Pamela Mobilia, 1992. "Determinants of Interest Rates on Tax-Exempt Hospital Bonds," NBER Working Papers 4139, National Bureau of Economic Research, Inc.
  7. Mary E. Deily & Niccie L. McKay & Fred H. Dorner, 2000. "Exit and Inefficiency: The Effects of Ownership Type," Journal of Human Resources, University of Wisconsin Press, vol. 35(4), pages 734-747.
  8. Keeler, Emmett B. & Melnick, Glenn & Zwanziger, Jack, 1999. "The changing effects of competition on non-profit and for-profit hospital pricing behavior," Journal of Health Economics, Elsevier, Elsevier, vol. 18(1), pages 69-86, January.
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  10. Pauly, Mark V & Redisch, Michael, 1973. "The Not-For-Profit Hospital as a Physicians' Cooperative," American Economic Review, American Economic Association, American Economic Association, vol. 63(1), pages 87-99, March.
  11. Timothy Dunne & Mark J. Roberts & Larry Samuelson, 1988. "Patterns of Firm Entry and Exit in U.S. Manufacturing Industries," RAND Journal of Economics, The RAND Corporation, vol. 19(4), pages 495-515, Winter.
  12. Edward C. Norton & Douglas O. Staiger, 1994. "How Hospital Ownership Affects Access to Care for the Uninsured," RAND Journal of Economics, The RAND Corporation, vol. 25(1), pages 171-185, Spring.
  13. Henry Hansmann & Daniel Kessler & Mark McClellan, 2002. "Ownership Form and Trapped Capital in the Hospital Industry," NBER Working Papers 8989, National Bureau of Economic Research, Inc.
  14. Sloan, Frank A. & Picone, Gabriel A. & Taylor, Donald H., Jr. & Chou, Shin-Yi, 2000. "Hospital Ownership and Cost and Quality of Care: Is There a Dime's Worth of Difference?," Working Papers, Duke University, Department of Economics 00-11, Duke University, Department of Economics.
  15. Sloan, Frank A., 2000. "Not-for-profit ownership and hospital behavior," Handbook of Health Economics, Elsevier, in: A. J. Culyer & J. P. Newhouse (ed.), Handbook of Health Economics, edition 1, volume 1, chapter 21, pages 1141-1174 Elsevier.
  16. Richard Disney & Jonathan Haskel & Ylva Heden, 2003. "Entry, Exit and Establishment Survival in UK Manufacturing," Journal of Industrial Economics, Wiley Blackwell, Wiley Blackwell, vol. 51(1), pages 91-112, 03.
  17. Zuckerman, Stephen & Hadley, Jack & Iezzoni, Lisa, 1994. "Measuring hospital efficiency with frontier cost functions," Journal of Health Economics, Elsevier, Elsevier, vol. 13(3), pages 255-280, October.
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  19. Donald F. Vitaliano & Mark Toren, 1996. "Hospital Cost and Efficiency in a Regime of Stringent Regulation," Eastern Economic Journal, Eastern Economic Association, vol. 22(2), pages 161-175, Spring.
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  21. Mark Duggan, 2002. "Hospital Market Structure and the Behavior of Not-For-Profit Hospitals," RAND Journal of Economics, The RAND Corporation, vol. 33(3), pages 433-446, Autumn.
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Cited by:
  1. Harrison, Teresa & Seim, Katja, 2013. "Nonprofit tax exemptions and market structure: The case of fitness centers," School of Economics Working Paper Series, LeBow College of Business, Drexel University 2013-4, LeBow College of Business, Drexel University.
  2. János Kornai, 2009. "The soft budget constraint syndrome in the hospital sector," Society and Economy, Akadémiai Kiadó, Hungary, Akadémiai Kiadó, Hungary, vol. 31(1), pages 5-31, June.
  3. Yu-Chu Shen & Karen Eggleston, 2008. "The Effect of Soft Budget Constraints on Access and Quality in Hospital Care," NBER Working Papers 14256, National Bureau of Economic Research, Inc.
  4. Pierre Koning & Joëlle Noailly & Sabine Visser, 2007. "Do non-profits make a difference? Evaluating non-profit vis-à -vis for-profit organisations in social services," CPB Document, CPB Netherlands Bureau for Economic Policy Analysis 142, CPB Netherlands Bureau for Economic Policy Analysis.
  5. Joëlle Noailly & Sabine Visser & Paul Grout, 2007. "The impact of market forces on the provision of childcare: Insights from the 2005 Childcare Act in the Netherlands," CPB Memorandum, CPB Netherlands Bureau for Economic Policy Analysis 176, CPB Netherlands Bureau for Economic Policy Analysis.
  6. Martin Gaynor & Robert J Town, 2012. "Competition in Health Care Markets," The Centre for Market and Public Organisation 12/282, Department of Economics, University of Bristol, UK.
  7. Marco Castaneda & Dino Falaschetti, 2008. "Does a Hospital’s Profit Status Affect its Operational Scope?," Review of Industrial Organization, Springer, Springer, vol. 33(2), pages 129-159, September.
  8. Edward Schumacher, 2009. "Does Public or Not-for-Profit Status Affect the Earnings of Hospital Workers?," Journal of Labor Research, Springer, Springer, vol. 30(1), pages 9-34, March.
  9. James, Harvey S., Jr., 2007. "A New Institutional Economics Perspective on the Relationship Among Societal Values, Governance Structure and Access to Rural Health Care Services," Working Papers, University of Missouri Columbia, Department of Agricultural Economics 7362, University of Missouri Columbia, Department of Agricultural Economics.
  10. Charles Hegji, 2007. "A brief look at hospital profits by outpatient services offered," Economics Bulletin, AccessEcon, vol. 9(12), pages 1-10.
  11. repec:ebl:ecbull:v:9:y:2007:i:12:p:1-10 is not listed on IDEAS

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