The effects of hospital competition on nonprofit and for-profit hospital medicaid share

• Date: 06 September 2000
• Published date: 06 September 2000
• Pages: 275-294
• DOI: https://doi.org/10.1016/S0193-5895(00)19008-6
• Author: Sheri L Eisert

THE EFFECTS OF HOSPITAL

COMPETITION ON NONPROFIT AND

FOR-PROFIT HOSPITAL MEDICAID

SHARE

Sheri L. Eisert

ABSTRACT

This paper empirically tests whether the nonprofit hospital is influenced by

the community benefit standard by analyzing differences in nonprofit and

for-profit hospital inpatient Medicaid share, while controlling for the

effects of hospital market competition. Hospital specific data for this study

are from the 1991 American Hospital Association Annual Survey of

Hospitals and the 1991 Medicare Minimum Cost Report by the Health

Care Financing Administration. The sample includes 192 for-profit, 899

nonprofit and 221 government-owned general acute care hospitals. Key

variables in the multivariate analysis include hospital inpatient Medicaid

share as the dependent variable and Medicaid demand, market competi-

tion and input quality as independent variables. The principal findings are

that nonprofit hospitals serve a larger share of Medicaid inpatients than

for-profit hospitals although the greater the presence o f for-profit hospitals

in the market (one measure of market competition) the smaller the

nonprofit hospital Medicaid share. It is concluded that nonprofit hospitals

reduce their level of community benefit, where community benefit is

Research in Law and Economics, Volume 19, pages 275-294.

2000 JAI/Elsevier Inc.

ISBN: 0-7623-0308-5

275

276 SHERI L. EISERT

measured as a hospital's percent Medicaid share, in markets with a

greater presence of for-profit hospitals.

I. INTRODUCTION

This paper explores the impact of the differences in the objectives of nonprofit

and for-profit hospitals, and the effects of market competition, on their decision

to accept Medicaid patients. Providing an alternative for unwanted demand by

nonprofit and for-profit hospitals, government-owned hospitals are treated as

'hospitals of last resort'. For the purposes of this paper, hospitals are

community acute care hospitals, where nonprofit hospitals are synonymous

with private not-for-profit hospitals and government-owned hospitals refer to

state and local hospitals, including tax-district hospitals.

The literature on nonprofit organizations contains a wide range of

hypothesized objective functions. Economists have distinguished the objective

function of nonprofits from for-profits as involving the maximization of utility

of the manager/owner constrained either by output or a budget rather than

maximizing the profits of a firm. a Others have modeled nonprofit objectives as

maximizing profit (net revenue), which includes an additional term for social

benefits, 2 while others assume nonprofits maximize an expected social welfare

function. 3 Some theorists argue that it is difficult to develop a general nonprofit

model because there is lack of a singular objective. 4 One similarity among each

of these specifications of nonprofit objectives includes a factor representing the

community's interests, where the differences lie in defining community

interests and the weight placed on maximizing net revenue.

In this study, community benefit is measured by the nonprofit hospital's

provision of inpatient Medicaid services, which is reimbursed at less than

average cost in most states. 5 Factors which are expected to influence nonprofit

and for-profit inpatient Medicaid share are Medicaid reimbursement rates;

Medicaid demand; and market competition and hospital input quality, where a

hospital's inpatient Medicaid share is defined as the percent of a hospital's

inpatient days which are for Medicaid patients. Unlike other studies analyzing

the effects of hospital market competition using the Herfindahl I-Iirschman

Index (HHI), this study considers the effects of the presence of for-profit

hospitals in the market. Therefore, the focus of this study is to first determine

whether nonprofit hospitals provide a larger share of their inpatient services to

Medicaid patients than for-profit hospitals, providing a benefit to the

community in exchange for tax-exempt status. Second, this study considers

whether hospital competition has an influence over a nonprofit hospital's

decision to provide this community benefit. With an increased emphasis on