Chapter 4 - Health Care Systems and Institutions

Tradeoffs in healthcare.

1. Chapter 4:
Health Care Systems and
Institutions

2. Not-for-profit (NFP) Management
NFPs a large presence in the health care sector.
Blue Cross Blue Shield
70% of all hospital beds controlled by NFPs
Distinctive features of NFPs vs. FPs
Initial Capital Source
donations vs. revenue from stock issue
Use of profits
not distributable as cash dividend
Firm sale or liquidation
proceeds not distributable to “owners/managers”
Taxes
exempt from certain taxes

3. Why do NFPs exist?
Imperfect Information.
Consumers have less info than providers
vulnerable
Prefer providers whose bottom line isn’t profits
Equity/Altruism
communities want health care for the poor
Externalities
FP’s don’t take into account full societal benefits
for health care.
e.g. infectious diseases

4. Why do NFPs exist? (cont.)
Why NFP health care as opposed to government
provided health care?
Consumer needs are heterogeneous.
e.g. religious affiliated hospitals
children’s hospitals
nursing homes
other ancillary providers

5. Incentives of NFP providers
Possible Utility Function :
Utility = U(Quantity, Quality)
Utility maximization vs. profit maximization.
Who’s utility?
Managers
Board of Trustees/Board of Directors
Physicians
Community

6. Physicians make the production decisions in
hospitals.
Assume Physicians maximize their income.
Physicians will want hospital resources that
help them maximize their patient load.
e.g. beds, staff, diagnostic equipment.
Physicians’ interests more in line with NFP
managers.
Physicians and NFP Providers

7. Empirical Evidence on Nonprofits
Little or no difference in efficiency (costs) between
for-profits & nonprofits.
Prices higher in for-profit hospitals
But nonprofits enjoy tax advantages and charitable
contributions.
NP hospitals generate more community benefits
than FP’s.
Monetary value of benefits exceeds subsidy received
through tax-exempt status.

8. Nuns’ Zeal for Profits Shapes Hospital Chain,
Wins Wall Street Fans
‘No Margin, No Mission
“With 49 hospitals in 12 states and nearly $6b in annual
revenue, Daughters [of Charity] ranks among the top 5
hospital systems in the nation.”
“…their cash and investments have ballooned to about
$2b, believed to be one of the largest reserves of any
nonprofit hospital system in the country.”
“Daughters now gets 60% of its income from its
investment portfolio”
WSJ 1/7/98

9. ‘Daughters of Currency’??
“Though Daughters spends about 86¢ on charity care
and community work for every $1 of profit…’we don’t
say we’ll take care of the poor until we run out of
money.’
“One half of my brain is what’s the right thing to do; one
half is a clinking cash register.”
“The biggest savings, however, have come from selling
unprofitable hospitals.”
WSJ 1/7/98

10. Nonprofit to For-Profit Conversions
34 hospital conversions in 1994, 59 in
1995.
BCBS plans are converting to FP
status.
1981 -82% of HMOs were nonprofit.
1995 -29% “ “ “ “
Claxton et al., Health Affairs 1997

11. Nonprofit to For-Profit Conversions
Conversions provide NFPs with access
to capital.
Well-established NFPs are an attractive
acquisition for FP’s.
Claxton et al., Health Affairs 1997

12. Entrepreneurs Look to Profit
on Nonprofit HospitalsVANGUARD HEALTH
SYSTEMS
MISSIONHEALTH
Business PlanProposes to build integrated
health care delivery systems in
geographic regions by buying
hospitals, physician groups and
related services.
Seeks to take equity positions in
nonprofit hospitals using an innovative
structure that permits nonprofit
companies to own partnerships.
Market Cap $1.5 billion $2 billion
Management Hospitals will be managed by
Vanguard, with community
boards having input.
Hospitals will be left in the hands of their
executives.
WSJ 2/2/98

13. Although NFP managers may not maximize
profits, have an incentive to produce as
cheaply as possible.
Conditions for survival
some degree of market power
consumers insensitive to price increase
government tax exemption
If degree of price competition intensifies,
behavioral differences between NFPs and FPs
may diminish.
Will NFPs survive increasing
competition?