Chapter 4: Health Care Systems and Institutions

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Chapter 4 Health Care Systems and Institutions

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Not-for-profit (NFP) Management

• NFPs a large presence in the health care sector.
• Blue Cross Blue Shield
• 70 of all hospital beds controlled by NFPs

• Distinctive features of NFPs vs. FPs
• Initial Capital Source
• donations vs. revenue from stock issue
• Use of profits
• not distributable as cash dividend
• Firm sale or liquidation
• proceeds not distributable to owners/managers
• Taxes
• exempt from certain taxes

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Why do NFPs exist?

• Equity/Altruism
• communities want health care for the poor

• Externalities
• FPs dont take into account full societal
  benefits for health care.
• e.g. infectious diseases

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Why do NFPs exist? (cont.)

• Why NFP health care as opposed to government
  provided health care?
• Consumer needs are heterogeneous.
• e.g. religious affiliated hospitals
• childrens hospitals
• nursing homes
• other ancillary providers

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Incentives of NFP providers

• Utility maximization vs. profit maximization.
  Whos utility?
• Managers
• Board of Trustees/Board of Directors
• Physicians
• Community

• Possible Utility Function
• Utility U(Quantity, Quality)

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Physicians and NFP Providers

• Physicians make the production decisions in
  hospitals.
• Assume Physicians maximize their income.
• Physicians will want hospital resources that help
  them maximize their patient load.
• e.g. beds, staff, diagnostic equipment.
• Physicians interests more in line with NFP
  managers.

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Empirical Evidence on Nonprofits

• Little or no difference in efficiency (costs)
  between for-profits nonprofits.
• Prices higher in for-profit hospitals
• But nonprofits enjoy tax advantages and
  charitable contributions.
• NP hospitals generate more community benefits
  than FPs.
• Monetary value of benefits exceeds subsidy
  received through tax-exempt status.

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Nuns Zeal for Profits Shapes Hospital Chain,
Wins Wall Street Fans No Margin, No Mission
With 49 hospitals in 12 states and nearly 6b in
annual revenue, Daughters of Charity ranks
among the top 5 hospital systems in the
nation. their cash and investments have
ballooned to about 2b, believed to be one of the
largest reserves of any nonprofit hospital system
in the country. Daughters now gets 60 of its
income from its investment portfolio

WSJ 1/7/98
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Daughters of Currency??
Though Daughters spends about 86 on charity
care and community work for every 1 of
profitwe dont say well take care of the poor
until we run out of money. One half of my
brain is whats the right thing to do one half
is a clinking cash register. The biggest
savings, however, have come from selling
unprofitable hospitals.
WSJ 1/7/98
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Nonprofit to For-Profit Conversions

• 34 hospital conversions in 1994, 59 in 1995.
• BCBS plans are converting to FP status.
• 1981 - 82 of HMOs were nonprofit.
• 1995 - 29

Claxton et al., Health Affairs 1997
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Nonprofit to For-Profit Conversions

• Conversions provide NFPs with access to capital.
• Well-established NFPs are an attractive
  acquisition for FPs.

Claxton et al., Health Affairs 1997
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Entrepreneurs Look to Profit on Nonprofit
Hospitals
WSJ 2/2/98
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Will NFPs survive increasing competition?

• Although NFP managers may not maximize profits,
  have an incentive to produce as cheaply as
  possible.
• Conditions for survival
• some degree of market power
• consumers insensitive to price increase
• government tax exemption
• If degree of price competition intensifies,
  behavioral differences between NFPs and FPs may
  diminish.