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

Date06 September 2000
Published date06 September 2000
AuthorSheri L Eisert
Sheri L. Eisert
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
measured as a hospital's percent Medicaid share, in markets with a
greater presence of for-profit hospitals.
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

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