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Does Managed Care Change the Mission of Nonprofit Hospitals? Evidence From the Managerial Labor Market

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  • Richard Arnould
  • Marianne Bertrand
  • Kevin F. Hallock

Abstract

This paper examines how the managerial labor market in nonprofit hospitals has adjusted to the negative income pressures created by HMO penetration. Using a panel of about 1500 nonprofit hospitals over the period 1992 to 1996, we find that top executive turnover increases following an increase in HMO penetration. Moreover, the increase in turnover is concentrated among the hospitals that have low levels of economic profitability and are more financially leveraged. While the link between top executive pay and for-profit performance measures is on average very weak, HMO penetration substantially tightens that link: as HMO penetration increases, top executives are compensated more for improving the profitability of their hospitals. These results are consistent with the view that HMO penetration increases the importance of for-profit performance objectives among not-for-profit hospitals. Boards appear to fire the managers that are least able to compete in the new competitive environment and reward incumbent managers more for achieving for-profit goals. Consistent with donors' belief that these changes represent a weakening of the nonprofit mission and not simply an attempt by altruistic boards to protect intergenerational equity, we find that public donations fall as HMO market share increases.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7924.

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Date of creation: Sep 2000
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Handle: RePEc:nbr:nberwo:7924

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  1. S. Baranzoni & P. Bianchi & L. Lambertini, 2000. "Market Structure," Working Papers 368, Dipartimento Scienze Economiche, Universita' di Bologna.
  2. Warner, Jerold B. & Watts, Ross L. & Wruck, Karen H., 1988. "Stock prices and top management changes," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 461-492, January.
  3. Baker, Laurence C & Corts, Kenneth S, 1996. "HMO Penetration and the Cost of Health Care: Market Discipline or Market Segmentation?," American Economic Review, American Economic Association, vol. 86(2), pages 389-94, May.
  4. Jensen, Michael C & Murphy, Kevin J, 1990. "Performance Pay and Top-Management Incentives," Journal of Political Economy, University of Chicago Press, vol. 98(2), pages 225-64, April.
  5. Edward L. Glaeser & Andrei Shleifer, 1998. "Not-For-Profit Entrepreneurs," NBER Working Papers 6810, National Bureau of Economic Research, Inc.
  6. Preston, Anne E, 1989. "The Nonprofit Worker in a For-Profit World," Journal of Labor Economics, University of Chicago Press, vol. 7(4), pages 438-63, October.
  7. Sarah Feldman & David S. Scharfstein, 2000. "Managed Care and Provider Volume," NBER Chapters, in: The Changing Hospital Industry: Comparing For-Profit and Not-for-Profit Institutions, pages 229-248 National Bureau of Economic Research, Inc.
  8. Sherwin Rosen, 1990. "Contracts and the Market for Executives," NBER Working Papers 3542, National Bureau of Economic Research, Inc.
  9. Weisbach, Michael S., 1988. "Outside directors and CEO turnover," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 431-460, January.
  10. Laurence C. Baker & Martin L. Brown, 1997. "The Effect of Managed Care on Health Care Providers," NBER Working Papers 5987, National Bureau of Economic Research, Inc.
  11. David M. Cutler & Jill R. Horwitz, 1998. "Converting Hospitals from Not-for-profit to For-profit Status," NBER Working Papers 6672, National Bureau of Economic Research, Inc.
  12. David M. Cutler & Jill Horwitz, 2000. "Converting Hospitals from No t-for-Profit to For-Profit Status Why and What Effects?," NBER Chapters, in: The Changing Hospital Industry: Comparing For-Profit and Not-for-Profit Institutions, pages 45-90 National Bureau of Economic Research, Inc.
  13. Murphy, Kevin J. & Zimmerman, Jerold L., 1993. "Financial performance surrounding CEO turnover," Journal of Accounting and Economics, Elsevier, vol. 16(1-3), pages 273-315, April.
  14. Leslie Eldenburg & Benjamin E. Hermalin & Michael S. Weisbach & Marta Wosinska, 2001. "Hospital Governance, Performance Objectives, and Organizational Form," NBER Working Papers 8201, National Bureau of Economic Research, Inc.
  15. Murphy, Kevin J., 1985. "Corporate performance and managerial remuneration : An empirical analysis," Journal of Accounting and Economics, Elsevier, vol. 7(1-3), pages 11-42, April.
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Cited by:
  1. Besley, Timothy J. & Ghatak, Maitreesh, 2004. "Competition and Incentives with Motivated Agents," CEPR Discussion Papers 4641, C.E.P.R. Discussion Papers.
  2. Powers, Eric A., 2005. "Interpreting logit regressions with interaction terms: an application to the management turnover literature," Journal of Corporate Finance, Elsevier, vol. 11(3), pages 504-522, June.
  3. Karen Eggleston & Richard Zeckhauser, 2002. "Government Contracting for Health Care," Discussion Papers Series, Department of Economics, Tufts University 0202, Department of Economics, Tufts University.
  4. Gillian Currie & Cam Donaldson & Mingshan Lu, 2003. "What Does Canada Profit from the For-Profit Debate on Health Care?," Canadian Public Policy, University of Toronto Press, vol. 29(2), pages 227-251, June.

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