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Converting Hospitals from Not-for-profit to For-profit Status

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  • David M. Cutler
  • Jill R. Horwitz

Abstract

Over the past twenty-five years, about 330 (7 percent) of the country's 5,000 not-for-profit hospitals have converted to for-profit form This paper explores the causes and effects of conversions through two case studies -- Wesley Medical Center in Wichita, Kansas and the Columbia/HealthOne system in Denver, Colorado. We identify two primary explanations of why hospitals convert: financial concerns and board culture-perceived mission. Financial concerns are multifaceted and include expectations about future profits, anticipated problems servicing debt, and pessimism regarding the future of government reimbursement policies. The effects of these conversions are mixed. There are some efficiencies associated with conversions such as cost-cutting, increased access to capital, and debt-burden relief. However, profits are often derived from increasing reimbursement from the public sector. Further, conversions are likely to cause fragmentation of the hospital market between rich and poor. The results show that not-for-profit hospitals are likely to copy the undesirable behavior of for-profit hospitals in their markets.

Suggested Citation

  • David M. Cutler & Jill R. Horwitz, 1998. "Converting Hospitals from Not-for-profit to For-profit Status," NBER Working Papers 6672, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:6672
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    1. Jason Barro & David M. Cutler, 2000. "Consolidation in the Medical Care Marketplace,A Case Study from Massachusetts," NBER Chapters, in: Mergers and Productivity, pages 9-50, National Bureau of Economic Research, Inc.
    2. Richard G. Frank & David S. Salkever, 1994. "Nonprofit Organizations in the Health Sector," Journal of Economic Perspectives, American Economic Association, vol. 8(4), pages 129-144, Fall.
    3. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
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    Cited by:

    1. Laurent Gobillon & Carine Milcent, 2013. "Spatial disparities in hospital performance," Journal of Economic Geography, Oxford University Press, vol. 13(6), pages 1013-1040, November.
    2. Donald Lien, 2002. "Competition between Nonprofit and For-Profit Firms," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 1(3), pages 193-207, December.
    3. Edward L. Glaeser, 2002. "The Governance of Not-For-Profit Firms," NBER Working Papers 8921, National Bureau of Economic Research, Inc.
    4. Edward L. Glaeser, 2002. "The Governance of Not-for-Profit Firms," Harvard Institute of Economic Research Working Papers 1954, Harvard - Institute of Economic Research.
    5. Leone, Andrew J. & Van Horn, R. Lawrence & Wedig, Gerard J., 2005. "Abnormal returns and the regulation of nonprofit hospital sales and conversions," Journal of Health Economics, Elsevier, vol. 24(1), pages 113-135, January.
    6. Huckman, Robert S., 2006. "Hospital integration and vertical consolidation: An analysis of acquisitions in New York State," Journal of Health Economics, Elsevier, vol. 25(1), pages 58-80, January.
    7. Glaeser, Edward L. & Shleifer, Andrei, 2001. "Not-for-profit entrepreneurs," Journal of Public Economics, Elsevier, vol. 81(1), pages 99-115, July.
    8. Jill R. Horwitz, 2005. "Does Corporate Ownership Matter? Service Provision in the Hospital Industry," NBER Working Papers 11376, National Bureau of Economic Research, Inc.
    9. Mark Duggan, 2000. "Hospital Market Structure and the Behavior of Not-for-Profit Hospitals: Evidence from Responses to California's Disproportionate Share Program," NBER Working Papers 7966, National Bureau of Economic Research, Inc.
    10. Elaine Silverman & Jonathan Skinner, 2001. "Are For-Profit Hospitals Really Different? Medicare Upcoding and Market Structure," NBER Working Papers 8133, National Bureau of Economic Research, Inc.
    11. Paul A. Grout & Michelle J. Yong, 2003. "The Role of Donated Labour and Not for Profit at the Public/Private Interface," The Centre for Market and Public Organisation 03/074, The Centre for Market and Public Organisation, University of Bristol, UK.
    12. Leemore S. Dafny, 2003. "How Do Hospitals Respond to Price Changes?," NBER Working Papers 9972, National Bureau of Economic Research, Inc.
    13. Laurent Gobillon & Carine Milcent, 2008. "Regional disparities in mortality by heart attack: evidence from France," Working Papers halshs-00586837, HAL.
    14. Gillian Currie & Cam Donaldson & Mingshan Lu, 2003. "What Does Canada Profit from the For-Profit Debate on Health Care?," Canadian Public Policy, University of Toronto Press, vol. 29(2), pages 227-251, June.
    15. Jill R. Horwitz & Austin Nichols, 2007. "What Do Nonprofits Maximize? Nonprofit Hospital Service Provision and Market Ownership Mix," NBER Working Papers 13246, National Bureau of Economic Research, Inc.
    16. Pierre Koning & Joëlle Noailly & Sabine Visser, 2007. "Do Not-For-Profits Make a Difference in Social Services? A Survey Study," De Economist, Springer, vol. 155(3), pages 251-270, September.
    17. Jonathan S. Skinner & John Wennberg, 2000. "How Much Is Enough? Efficiency and Medicare Spending in the Last Six Months of Life," NBER Chapters, in: The Changing Hospital Industry: Comparing Not-for-Profit and For-Profit Institutions, pages 169-194, National Bureau of Economic Research, Inc.
    18. C. Du Bois & R. Caers & M. Jegers & C. Schepers & S. De Gieter & R. Pepermans, 2004. "Agency problems and unrelated business income of non-profit organizations: an empirical analysis," Applied Economics, Taylor & Francis Journals, vol. 36(20), pages 2317-2326.
    19. Janet Currie & Mehdi Farsi & W. Bentley Macleod, 2005. "Cut to the Bone? Hospital Takeovers and Nurse Employment Contracts," ILR Review, Cornell University, ILR School, vol. 58(3), pages 471-493, April.
    20. Marco Castaneda & Dino Falaschetti, 2008. "Does a Hospital’s Profit Status Affect its Operational Scope?," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 33(2), pages 129-159, September.
    21. Richard Arnould & Marianne Bertrand & Kevin F. Hallock, 2000. "Does Managed Care Change the Mission of Nonprofit Hospitals? Evidence From the Managerial Labor Market," NBER Working Papers 7924, National Bureau of Economic Research, Inc.

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