Hospital Ownership and Public Medical Spending

Abstract

The hospital market is served by firms that are private for-profit, private not-for-profit, and government-owned and operated. I use a plausibly exogenous change in hospital financing that was intended to improve medical care for the poor to test three theories of organizational behavior. I find that the critical difference between the three types of hospitals is caused by the soft budget constraint of government-owned institutions. The decision-makers in private not-for-profit hospitals are just as responsive to financial incentives and are no more altruistic than their counterparts in profit-maximizing facilities. My final set of results suggests that the significant increase in public medical spending examined in this paper has not improved health outcomes for the indigent. I. INTRODUCTION The hospital market is served by firms that are private for-profit, private not-for-profit, and publicly owned and operated. In this paper I examine how a hospital's type of ownership influences its response to profitable opportunities that are created by changes in government policy. The policy change that I exploit was designed to improve the quality of medical care for lowincome individuals by significantly increasing hospitals' financial incentives to treat them. This program also substantially increased the revenues of those hospitals that had been serving a disproportionate share of the indigent. I use this plausibly exogenous change in government policy to test three different theories of organizational behavior, and then to assess the impact of hospital behavioral responses on health outcomes. The response of organizations to changes in government policy will have an important impact on the consequences of these policies. This is likely to be especially true in the medical sector, in which the federal, state, and local governments contract directly