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Does Nonprofit Ownership Matter for Firm Performance? Financial Distress and Ownership Conversion of Nursing Homes

Author

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  • Lauren Xiaoyuan Lu

    (Tuck School of Business, Dartmouth College, Hanover, New Hampshire 03755)

  • Susan Feng Lu

    (Krannert School of Management, Purdue University, West Lafayette, Indiana 47907)

Abstract

In the past two decades, many nursing homes converted their ownership status from nonprofit to for-profit (NP-to-FP). These conversions have drawn public scrutiny and triggered a debate about the implications of ownership conversions on nursing home performance. Exploring a nationwide panel data set of U.S. nursing homes from 2006 to 2017, we observe that nursing homes with higher financial distress are associated with higher likelihood of NP-to-FP conversions. The postconversion operating margins increased significantly. Converted nursing homes improved their financial performance by reducing operating costs while keeping net resident revenues unchanged. Both cutting registered nurse staffing and cutting overhead staffing contributed to reductions in operating costs; however, only the former cost-reduction measure had a negative impact on quality. On average, the postconversion quality of care declined. The effects of NP-to-FP conversions on nursing homes were moderated by preconversion financial distress: High-distress nursing homes aggressively cut registered nurse staffing and experienced severe quality decline, whereas low-distress ones kept registered nurse staffing unchanged and largely avoided quality decline. These findings lead to both policy and managerial insights. To nursing home regulators, we recommend increased oversight on NP-to-FP conversions of nursing homes with high preconversion financial distress. To managers of nursing homes undergoing NP-to-FP conversions, our findings suggest that although cost reduction is an effective strategy to improve financial performance, they need to avoid the pitfall of cutting registered nurse staffing and instead focus on streamlining overhead operations in order to increase operating efficiency without compromising quality.

Suggested Citation

  • Lauren Xiaoyuan Lu & Susan Feng Lu, 2022. "Does Nonprofit Ownership Matter for Firm Performance? Financial Distress and Ownership Conversion of Nursing Homes," Management Science, INFORMS, vol. 68(7), pages 5127-5145, July.
    • Handle: RePEc:inm:ormnsc:v:68:y:2022:i:7:p:5127-5145
    DOI: 10.1287/mnsc.2021.4159
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    References listed on IDEAS

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