Chapter 4: Health Care Systems and Institutions

Not-for-profit (NFP) Management lNFPs a large presence in the health care sector. k Blue Cross Blue Shield k70% of all hospital beds controlled by NFPs lDistinctive 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” ¹Taxes exempt from certain taxes

Why do NFPs exist? ¬ Imperfect Information. k Consumers have less info than providers vulnerable vulnerable k Prefer providers whose bottom line isn’t profits ­ Equity/Altruism kcommunities want health care for the poor ® Externalities kFP’s don’t take into account full societal benefits for health care. e.g. infectious diseases e.g. infectious diseases

Why do NFPs exist? (cont.) l Why NFP health care as opposed to government provided health care? kConsumer needs are heterogeneous. e.g. religious affiliated hospitals children’s hospitals children’s hospitals nursing homes nursing homes other ancillary providers other ancillary providers

Incentives of NFP providers l Possible Utility Function : Utility = U(Quantity, Quality) Utility = U(Quantity, Quality) l Utility maximization vs. profit maximization. Who’s utility? ¶ Managers · Board of Trustees/Board of Directors ¸ Physicians ¹ Community

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

Empirical Evidence on Nonprofits l Little or no difference in efficiency (costs) between for-profits & nonprofits. l Prices higher in for-profit hospitals  But nonprofits enjoy tax advantages and charitable contributions. l NP hospitals generate more community benefits than FP’s.  Monetary value of benefits exceeds subsidy received through tax-exempt status.

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

‘Daughters of Currency’?? “Though Daughters spends about 86¢ on charity care and community work for every $1 of profit…’we don’t say we’ll take care of the poor until we run out of money.’ “One half of my brain is what’s 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

Nonprofit to For-Profit Conversions l 34 hospital conversions in 1994, 59 in l BCBS plans are converting to FP status. l % of HMOs were nonprofit. l % “ “ “ “ Claxton et al., Health Affairs 1997

Nonprofit to For-Profit Conversions l Conversions provide NFPs with access to capital. l Well-established NFPs are an attractive acquisition for FP’s. Claxton et al., Health Affairs 1997

Entrepreneurs Look to Profit on Nonprofit Hospitals WSJ 2/2/98

lAlthough 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 ïIf degree of price competition intensifies, behavioral differences between NFPs and FPs may diminish. Will NFPs survive increasing competition?