E&F - lecture 9 Flashcards
Non-profit
no residual claimants (e.g. owners/stockholders)
Ø nonprofit firms face a non-distribution constraint: they are not allowed (by statutory provisions or by the government) to distribute any surpluses to persons or entities outside the firm
Non-profit (2)
- Foundations = do not have a particular owner, but have a stated mission, laid down in statutory provisions, about the goal of the firm.
- Mutual companies = owned by the member, members have most important say about the goal
- Public (state-owned) companies = owned by government or municipalities
For-profit
- Proprietary companies (limited group of owners)
- Public equity firms (tradeable on stock market, open to general public) = you can buy a share
- Private equity firms (limited group of investors)
- Venture capital firms (entrepreneurial investment/high risk)
- Buyout firms (major investments, mature firms)
Hybrids
- Conglomerates of non-profit and for-profit entities
In some countries: growing role of private equity in health care
Nevertheless: role of for-profit (FP) hospitals still limited
- In most countries FP hospitals play a limited role in providing hospital care
- Market shares of FP hospitals (in % of beds) are typically below 20%
- But the role of FP hospitals varies over time and across countries
Why are non-profit firms so popular? Three explanations
- Market and government failure:
Ø Non-profit firms result from underprovision of care due to market failure and government failure - Contract failure (agency problem):
Ø Non-profit firms are a response to contract failure due to asymmetric information: imposing goal constraints could reduce potential conflicts of interest and agency problems - Physician control (interest group theory):
Ø Non-profit firms are supported by physicians to retain control over the provision of health services and the allocation of inputs
Explanation 1. Market and government failure
- Hospital care has some public good properties:
− access to hospital care is beneficial for community at large, even when demand is limited
− For-profit firms may not be willing to invest in case of insufficient purchasing power of the population (= insufficient prospects for a reasonable return on investment). In areas where communities are very small, for-profit firms may not want to set up a hospital - Governments may not be willing to invest in sparsely populated areas because of a lack of voters and limited public means
- Hence, communities often supported non-profits hospitals to provide unmet demand
Community support of non-profit hospitals
Due to community support, initially (until mid 20th century) non-profit hospitals had strong competitive advantages due to low production costs:
* Access to cheap capital (charity, donations, real estate)
* Access to cheap labor (religious workers, volunteers)
* Resulting in affordable prices (= access to patients)
− people had only limited insurance coverage for hospital care
− tax-based subsidies for hospital care were absent or limited
* Therefore FP hospitals were typically restricted to providing care only to high-income patients
Explanation 2. Contract failure
- In hospital care asymmetric information and conflicts of interest result in principal-agent problems
- Agency theory: principals can align interests via appropriate contract design
- Complete contracts require:
– All available information and all future contingencies are included in the contract
– All observable information is verifiable by a third party
– Compensation is based on measured performance
– Principal has to devise an incentive scheme to motivate agents to act in their interest - In hospital care, complete contracts usually are not feasible, e.g. due to incomplete information on quality
- If (complete) contracts fail, how to align interests then?
State interventions to discourage/prevent FP-hospitals
- Prohibiting entry by FP hospitals (licensing)
- Subsidizing non-profit hospitals
− tax advantages (exemptions, subsidies)
− reimbursement of capital investments - Limiting access of FP hospitals to public funding
− no or limited reimbursement from social health insurance or tax-financed care (national health service)
Explanation 3. Physician control
- A nondistribution constraint may be in the interest of physicians because they can keep the hospital surplus (Pauly & Redisch, AER 1973)
- Physicians goal may be: maximize hospital residual per physician:
- Physician controlled nonprofit hospitals
Ø may act as profit maximizing firms
Ø but are likely generate lower profits than for-profit hospitals because the combination of inputs is not likely to be the most efficient
What determines the performance of a FP hospital?
Property rights theory: owners/stockholders want to maximize profits or shareholder value
This provides FP firms with incentives:
* to produce at lower unit costs
* to charge profit-maximizing prices
* to adjust to preferences of customers
These incentives are likely to be stronger for FP than for NP hospitals
But would these incentives result in a better performance of FP hospitals? not necessarily
Potential impact of market failure on performance
Hospital markets are often characterized by various sources of market failure
* Lack of adequate quality indicators and information
* Asymmetric information between hospitals and patients/payers
* Lack of price and quality sensitive buyers
* Entry barriers – not easy to set up a hospital
* High levels of market concentration (monopoly power)
In case of FP ownership this may result in relatively strong incentives for:
* Charging high prices (high mark-ups)
* Upcoding (e.g. classifying patients in higher paid DRGs)
* Cost reduction at expense of quality
* Risk selection (patients, locations, types of services)
What’s the empirical evidence?
Summary of empirical findings (e.g. Herrera et al. 2014):
* No unambiguous evidence of differences in cost or efficiency
* Weak evidence of higher quality (lower mortality) in NP-hospitals
* Strong evidence of higher prices in FP-hospitals
* Strong evidence of upcoding by FP-hospitals
* Weak evidence of risk selection by FP-hospitals (patients, locations, types of service)
Important caveat: performance FP/NP crucially depend on context:
* Availability and distribution of information on prices and quality
* Market structure (level of market concentration, entry barriers)
* Role and incentives for third-party payers (health insurers, government)
* Type of regulation (prices, entry, quality)
Why would governments prefer non-profit hospitals?
- Popular explanation: to avoid contract failure due to principal-agent problems emanating for asymmetric information and conflicts of interest
- Non-profit hospitals have fewer financial incentives to exploit their information surplus by charging higher prices or providing less quality care than for-profit hospitals
- If contract failure would indeed be a plausible explanation for prohibiting or discouraging FP hospitals: Why then are most physicians in many countries allowed to work in for-profit practices?
o Doctor and patient have more personal relationship than a hospital and a patient
