Organizational form and the provision of quality in healthcare markets

Abstract

The quality of healthcare is an important issue in any society. In the US the question “Which hospitals provide higher quality of care: Non-Profit (NP) or For-Profit (FP) ones?” is interesting both from the consumer and the policymaker perspective. The Arrow-Hansmann hypothesis states that NPs provide a higher level of quality, because of the lower incentive to exploit the opportunity to increase profits by reducing quality. Substantial empirical literature, however, rejects the main implication of this hypothesis: that quality of output is higher at NP organizations than at FP organizations. This thesis proposes a theory of information asymmetry in healthcare markets that is consistent with the empirical evidence and generates additional testable implications. US hospital data on 2006-2007 mortality rates (a measure of quality) support the central implication of the model: FPs have a higher variance of quality than NPs; 2006 data on US emergency room waiting times support the second implication: NPs have longer waiting times than FPs. Three additional implications find support in the data as well. Since the theory finds support in the data, I use it as a basis for policy recommendations. I review the various policy alternatives toward FP healthcare provision in the US. The theory developed herein supports government policies that encourage conversions of low-quality FPs into NPs. The analysis is built on two innovations. In the model presented doctors-entrepreneurs selfselect between the NP and FP sectors based on ability and not the degree of altruism, as in the previous literature. In the empirical analysis related to quality I use a newly constructed dataset