Academic journal article Atlantic Economic Journal

The Response to Market Power: Non-Profit Hospitals versus For-Profit Hospitals

Academic journal article Atlantic Economic Journal

The Response to Market Power: Non-Profit Hospitals versus For-Profit Hospitals

Article excerpt

Introduction

As part of its effort to control health care costs and protect the availability of services to local communities, the government frequently challenges the merger of hospitals operating in the same market. They, of course, assume that greater market concentration will lead to fewer services and higher prices. While the assumption is generally accepted for most industries, it is not the consensus in the literature covering the hospital industry. The main point of contention centers on non-profit hospitals, which represent the majority of hospitals in the USA. (1) For example, empirical evidence supports the view that non-profits set lower prices than for-profits when all other factors are similar. (2) What remains unclear is whether for-profit and non-profit hospitals both react the same way once faced with greater market power. Theoretically, there is reason to believe that non-profit hospitals do not react to increased market share in the same manner as their for-profit counterparts since the theories of firm behavior and managerial decision-making are not the same for the two types of institutions.

As with any non-profit organization, the model of the profit-maximizing firm cannot fully explain the behavior of the non-profit hospital. By its nature and its tax-exempt status, a non-profit hospital cannot pay dividends. Yet, in theory, there are residual net revenues. Absent, however, are defined property rights over the residual. (3) Allocation of the residual, therefore, depends on the "political" influence of special interest groups consisting of administrators, physicians, staff, philanthropic donors, and patients. For example, Pauly and Redisch (1973) argue that non-profit hospitals operate in the interest of physician cartels. Once they have captured control of the hospital, physicians pressure administrators to investments in capital and staff that will lead to increases in their revenues. Administrators, on the other hand, will target quantity and quality (Newhouse 1970). They gain utility through the prestige and income of a larger and more advanced facility. However, there are trade-offs between quality and quantity. The administrator will have to balance them in a way that will maximize his utility.

Lynk (1995) believes non-profit hospitals often fit a consumer cooperative model. In a sense, they are the captives of patients and donors. Such a situation could explain a greater quantity of charity care or lower prices. In reality, as Phelps (1997, p. 269) says, it is unlikely that one group completely controls the hospital. Like the formation of public policy, each special interest group is pushing the hospital in directions that promote its welfare. How successful it will be depend on the resources at its disposal, political skills of its members, and the rules of the game. Since these will differ for each group and the difference between groups will differ at each hospital, we cannot predict how a particular non-profit hospital will appear or behave.

The most important constraint on the influence of these groups is the competition faced by the hospital. As Frech (1996, p. 21) notes, the comparative statics of the response to market conditions by a non-profit hospital should mirror that of the for-profit hospital with which it must compete. Competition dictates the behavior of the non-profit hospital, not the ultimate pecuniary and nonpecuniary goals of the special interest groups. In the end, its prices, costs and level of efficiency will be on par with its for-profit competitors. Empirical evidence supports this conclusion (Pauly 1987; Dranove et al. 1986; Becker and Sloan 1985). But does this imply that in the absence of competition non-profit hospitals will behave differently than for-profits? It is quite possible that once the administrator's attention is no longer occupied by competitors, it is then captured by the special interest groups that are vying for the net-revenue residuals. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.