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Does Managerial 'Outsourcing' Reduce Expense Preference Behavior? A Comparison of Adopters and Non-Adopters of Contract-Management in US Hospitals

  • Kathleen Carey
  • Avi Dor
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    This paper explores potential realization of gains by hospitals that are managed on a day-to-day basis by external organizations under formal contracts. It draws from the incentives literature, which postulates that managers of firms where ownership is separated from control will employ an input mix that deviates from cost minimization. While this status applies to hospitals generally, we hypothesize that specialized managerial expertise, coupled with the threat of non-renewal, will improve efficiency in hospitals that opt for contract. Secondary data obtained from the AHA Annual Surveys (1991-1998) are applied to examine the distribution of expense preference' parameters for all contract management adopters both pre- and post-adoption. These are contrasted with two control groups of hospitals drawn from the same years using propensity score methods. Results reveal allocative inefficiency among both adoption and control groups but a significantly lower change in the expense preference parameter pre- and post-adoption associated with a staffing. This suggests that changes in incentive contracts are one important strategy hospitals are using to cope with competitive pressures.

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    File URL: http://www.nber.org/papers/w9157.pdf
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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9157.

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    Date of creation: Sep 2002
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    Handle: RePEc:nbr:nberwo:9157
    Note: HC
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    1. Loretta J. Mester, 1989. "Testing for Expense Preference Behavior: Mutual versus Stock Savings and Loans," RAND Journal of Economics, The RAND Corporation, vol. 20(4), pages 483-498, Winter.
    2. Guido W. Imbens, 1999. "The Role of the Propensity Score in Estimating Dose-Response Functions," NBER Technical Working Papers 0237, National Bureau of Economic Research, Inc.
    3. Awh, Robert Y & Primeaux, Walter J, Jr, 1985. "Managerial Discretion and Expense Preference Behavior," The Review of Economics and Statistics, MIT Press, vol. 67(2), pages 224-31, May.
    4. Van Vliet, ReneC. J. A. & Van Praag, Bernard M. S., 1987. "Health status estimation on the basis of MIMIC-health care models," Journal of Health Economics, Elsevier, vol. 6(1), pages 27-42, March.
    5. Edwards, Franklin R, 1977. "Managerial Objectives in Regulated Industries: Expense-Preference Behavior in Banking," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 147-62, February.
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