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Do Hospitals Cross Subsidize?

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  • Guy David
  • Richard Lindrooth
  • Lorens A. Helmchen
  • Lawton R. Burns

Abstract

Cross-subsidies are often considered the principal mechanism through which hospitals provide unprofitable care. Yet, hospitals' reliance on and extent of cross-subsidization are difficult to establish. We exploit entry by cardiac specialty hospitals as an exogenous shock to incumbent hospitals' profitability and in turn to their ability to cross-subsidize unprofitable services. Using patient-level data from general short-term hospitals in Arizona and Colorado before and after entry, we find that the hospitals most exposed to entry reduced their provision of services considered to be unprofitable (psychiatric, substance- abuse, and trauma care) and expanded their admissions for neurosurgery, a highly profitable service.

Suggested Citation

  • Guy David & Richard Lindrooth & Lorens A. Helmchen & Lawton R. Burns, 2011. "Do Hospitals Cross Subsidize?," NBER Working Papers 17300, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:17300
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    Cited by:

    1. Cory S. Capps & Dennis W. Carlton & Guy David, 2020. "Antitrust Treatment Of Nonprofits: Should Hospitals Receive Special Care?," Economic Inquiry, Western Economic Association International, vol. 58(3), pages 1183-1199, July.
    2. Desai, Sunita M. & Padmanabhan, Prianca & Chen, Alan Z. & Lewis, Ashley & Glied, Sherry A., 2023. "Hospital concentration and low-income populations: Evidence from New York State Medicaid," Journal of Health Economics, Elsevier, vol. 90(C).
    3. David, Guy & Lindrooth, Richard C. & Helmchen, Lorens A. & Burns, Lawton R., 2014. "Do hospitals cross-subsidize?," Journal of Health Economics, Elsevier, vol. 37(C), pages 198-218.
    4. Swanson, Ashley, 2021. "Physician investment in hospitals: Specialization, selection, and quality in cardiac care," Journal of Health Economics, Elsevier, vol. 80(C).
    5. Owsley, Kelsey M. & Lindrooth, Richard C., 2022. "Understanding the relationship between nonprofit hospital community benefit spending and system membership: An analysis of independent hospital acquisitions," Journal of Health Economics, Elsevier, vol. 86(C).
    6. Jinhyung Lee & Jeffrey S. McCullough & Robert J. Town, 2013. "The impact of health information technology on hospital productivity," RAND Journal of Economics, RAND Corporation, vol. 44(3), pages 545-568, September.
    7. Jingjing Ding & Chenpeng Feng & Gongbing Bi & Liang Liang & M. Khan, 2015. "Cone ratio models with shared resources and nontransparent allocation parameters in network DEA," Journal of Productivity Analysis, Springer, vol. 44(2), pages 137-155, October.

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    JEL classification:

    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production

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