M9: Non-profit firms in healthcare
18 important questions on M9: Non-profit firms in healthcare
What is the economic definition of non-profit (firms)?
nonprofit firms face a no distribution constraint: they are not allowed to distribute any surpluses to persons or entities outside the firm
Give the three types of ownerships in health care with examples
- Non-profit
- Foundations
- Mutual companies
- Public (state-owned) companies
- For-profit
- Proprietary (limited) companies
- Public equity firms (tradeable on stock market, open to general public)
- Private equity firms (closed group of investors)
- Hybrids
- Non-profits controlling for-profit entities (or joint ventures)
Why are non-profit firms so popular?
- Market and government failure: Non-profit firms result from underprovision of care due to market failure and government failure
- Contract failure (agency problem): Non-profit firms are a response to contract failure due to asymmetric information: imposing goal constraints could reduce potential agency problems
- Physician control (interest group theory): Non-profit firms are supported by physicians to retain control over the provision of health services and the allocation of inputs
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What public good property does hospital care have?
Relating to government failure:
- Why do for-profit firms not want to invest in non-profit hospital care?
- And why do governments not want to invest in non-profit hospital care?
- But who did often support non-profit hospitals?
not in case of insufficient purchasing power (insufficient prospects for reasonable ROI)
Governments:
not in sparsely populated areas because of a lack of voters
Communities often supported nonprofits hospitals to provide unmet demand
What was the role of forprofit hospitals until mid 20th century?
Relating to contract failure:
- Which theory is related to this?
- What four elements do 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
If (complete) contracts fail, how to align interests then?
Give three state interventions to discourage/prevent forprofit (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 taxfinanced care (national health service)
If contract failure would be a plausible explanation for government interventions to prohibit or discourage FP hospitals: Why then are most physicians in the US and elsewhere allowed to work in for-profit practices?
Give two reasons
Long term trust relationship of patient-GP: You build this personal relationship overtime, but with oncevisit relationship we have shorter contracts --> contract failure
Relating to physician control:
- What do Pauly & Redisch say about a no distribution constraint and physicans?
Relating to physician control:
What is the goal of a physician?
Give the formula and symbols
- goal: max HR = R(K,L,M0) - wL - rK – sM0
- restriction: fixed level of physicians’ input (M0)
- profit (residual) per physician = HR/M0
w = wages
L = labor force
r = price of capital (rent)
sM0 = price for doctors (fixed)
s = minimal price doctors have to earn to stay in business (opportunity costs; if you get less than the value of s, you stop your practice as a doctor). Physicians inputs are fixed inputs, you see this by the 0 attached to the M.
Physicians controlling nonprofit hospitals may act as profit maximizing firms but are likely generate lower profits than for-profit hospitals, why?
Property rights theory: owners/stockholders provide FP firms with incentives, which three?
- to produce at lower unit costs
- to charge profit-maximizing prices
- to adjust to preferences of customers
Do FP hospitals perform better?
Give four empirical findings on this from the study of Herrera (2014) about:
- Higher efficiency
- Higher quality
- Higher prices
- Upcoding
- Risk selection
What was an important caveat?
- Weak/no evidence in FP-hospitals
- Weak evidence of higher quality (lower mortality) in NP-hospitals
- Strong evidence in FP-hospitals
- Strong evidence of upcoding by FPhospitals
- Weak evidence by FP-hospitals (patients, locations, types of service)
Caveat: performance FP/NP depend on context:
- Market conditions (e.g. competition, role of insurers)
- Type of regulation (prices, entry, quality)
- Presence of information on prices and quality
- Ownership mix (spillover effects)
Under what conditions allowing for-profit hospitals can be beneficial to society?
Give four conditions
- Sufficient quality and price information
- Prevent dominant market situations (no monopoly). Enough providers for market competition.
- Price sensitive buyers: if buyers are not interested in price and you allow for profit, the drive to maximize prices is not limited buy any buyer.
- Price regulations: some procedures that are quite rare (only treated/done in a few hospitals) need maximum prices.
Why and how is the role of forprofit firms limited in health care? (3x)
- In most countries FP hospitals have played a limited role in providing hospital care
- Market shares of FP hospitals (in % of beds) are typically below 20%
- Role of FP hospitals varies over time and across countries
When did non-profit hospitals had strong competitive advantages due to low production costs?
And how did they have low production costs? (3x)
- Access to cheap capital (charity, donations, real estate)
- Access to cheap labour (religious workers, volunteers)
- Resulting in affordable prices (= access to patients): particularly important because people had only limited insurance coverage for hospital care and tax-based subsidies were also absent or limited
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