Academic journal article Economic Inquiry

The Demise of Hospital Philanthropy

Academic journal article Economic Inquiry

The Demise of Hospital Philanthropy

Article excerpt



Until the beginning of this century, most hospitals primarily served the poor and derived a major portion of their revenue from private philanthropy. The more affluent avoided hospital care and were treated in doctors' offices and at home (Starr [1982]; Rosenberg [1987]). This situation changed largely because of technological improvements such as anesthesia and asepsis, and the nonpoor began to demand care in hospitals. Private insurance plans offering the nonpoor nearly complete coverage for hospital care began in the 1930s and spread rapidly after World War II. major health legislation, Medicare and Medicaid, was enacted in 1965, extending hospital insurance to the elderly and the poor. By the late 1960s, hospitals derived nine-tenths of their revenue from insurance. Real donations for medical facility construction rose from $76 million in 1935 to a peak of $2.1 billion in 1965 and fell to $603 million by 1981 (1984 dollars).(1) In 1984, only 5 percent of the total spent on such construction was funded by philanthropy (Levit et al. [1985]).

The conventional wisdom has it that private and public hospital insurance has "crowded out" philanthropic support of hospitals. The public insurance argument is consistent with that of Abrams and Schmitz [1978] and Roberts [1984] who maintain that public welfare expenditures reduce or eliminate private giving to the poor. This argument appears to extend to private insurance as well.

This article describes the decline in donations to hospitals from conceptual as well as empirical perspectives. We first describe a simple one-period model of hospital and donor behavior. Hospitals choose utility-maximizing levels of output, while altruistic donors decide how much to contribute to hospitals and how much to spend on other goods. The model is used to analyze how insurance, various government subsidies, and other factors affect hospital and donor behavior.

The major insight from this model is that although rising insurance coverage tends to increase hospital output in the same way as a lump-sum government subsidy, the two have different effects on donations to the hospital. Growing insurance coverage may increase or decrease donations, while lump-sum subsidies to the hospital will unambiguously crowd out private donations.

The empirical work following the model incorporates empirical counterparts of the exogenous and donation variables examined in the theoretical section. Data come from (1) a time series spanning 1935-81 and (2) a single cross-section of nonprofit hospitals in 1978. The results indicate that increased insurance coverage for hospital care, especially the enactment of Medicare and Medicaid in the mid-1960s, reduced giving to hospitals. The contribution of public subsidies for construction varied, depending on whether the subsidy more closely resembled a matching or a lump-sum subsidy.


The model consists of a single not-for-profit hospital and a single representative donor.(2) The hospital chooses output (n) to maximize its utility from output,(3) while the donor chooses donations (D) to maximize utility from total hospital output and other goods (y). The donor behaves altruistically in that he does not use hospitals himself. The behavior of hospital patients is not explicitly modeled, although their presence will be felt. The output and donation decisions are interrelated since the donor likes hospital output and the level of donations affects the hospital's budge get constraint. To untangle the endogenous feedback effects between output and donations, the problem is described as a two-stage sequential game. In the first stage, the donor decides how much to donate. In the second stage, the hospital chooses how much output to produce, given the previously-determined level of donation.

Of course, the donor is acutely aware that the hospital's subsequent output decision will affect his utility. …

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