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Summary Module 9 : Non-profit firms in health care
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Summary of the lecture and the corresponding mandatory literature.
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Lecture 9ANon-profit:
● Non-profit → no profit → no difference allowed between total revenue and
total costs (TR - TC = 0)
● Not-for-profit → no commercial (revealed goal of the firm: no profit-
maximizing behavior)
Definition in economics:
● Non-profit or not-for-profit = no residual claimants (e.g. owners/stockholders)
○ Nonprofit firms face a non-distribution constraint → they are not
allowed (by statutory provisions or by the government) to distribute
any surpluses to persons or entities outside the firm.
Types of ownership in health care:
● Non-profit
○ Foundations
○ Mutual companies
○ Public (state-owned) companies
● For-profit
○ Proprietary companies → limited group of owners
○ Public equity firms → tradeable on stock market, open to general
public
○ Private equity firms → limited group of investors
■ Venture capital firms → entrepreneurial investment/high risk
■ Buyout firms → major investments, mature firms
● Hybrids
○ Conglomerates of nonprofit and for-profit entities
In some countries there is a growing role of private equity in health care. Nevertheless, the
role of for-profit hospitals is still limited. In most countries FP hospitals play a limited role in
providing hospital care. Market shares of FP hospitals are typically below 20 %. But the role
of FP hospitals varies over time and across countries.
Lecture 9B
Why are non-profit firms so popular? Three explanations:
● Market and government failure
○ Non-profit firms result from underprovision of care due to market failure and
government failure.
● Contract failure → agency problem
○ Non-profit firms are a response to contract failure due to
asymmetric information → imposing goal constraints could reduce
potential confilcts of interest and agency problems.
● Physician control → interest group theory
○ Non-profit firms are supported by physicians to retain control over the
provision of health services and the allocation of inputs
Market and government failure:
● Hospital care has some public good properties → access to hospital care is
beneficial for community at large.
, ● For-profit firms may not be willing to invest in case of insufficient
purchasing power of the population → insufficient prospects for a
reasonable return on investment.
● Governments may not be willing to invest in sparsely populated areas because of a
lack of voters and limited public means.
● Hence, communities often supported non-profit hospitals to provide unmet demand.
○ Due to community support, initially (until mid 20th century) non-profit hospitals
had strong competitive advantages due to low production costs:
■ Access to cheap capital → charity, donations, real estate
■ Access to cheap labor → religious workers, volunteers
■ Resulting in affordable prices → acces to patients
● People had only limited insurance coverage for hospital care
● Tax-based subsidies for hospital care were absent or limited
■ Therefore FP hospitals were restricted to providing care only to high-
income patients
Contract failure:
● Asymmetric information and conflicts of interest result in principal-agents problems.
● Agency theory → principals can align interest via appropriate contract
design.
● Complete contracts require:
○ All available information and all future contingencies are included in the
contract.
○ All observable information is verifiable by a third party.
○ Compensation is based on measured performance.
○ Principal has to devise an incentive scheme to motivate agents to act in their
interests.
● In hospital care, complete contracts usually are not feasible, due to incomplete
information on quality.
● If (complete) contracts fail, how to align interests then?
○ Non-profit goal constraint may reduce potential conflict of interest in the
presence of information asymmetry.
State interventions to discourage/prevent FP-hospitals:
● Prohibiting entry by FP hospitals (licensing)
● Subsidizing non-profit hospitals
○ Tax advantages
○ Reimbursement of capital investments
● Limiting access of FP hospitals to public funding
○ No or limited reimbursement from social health insurance or tax-financed care
(national health service)
Physician control:
● A nondistribution constraint may be in the interest of physicians because they can
keep the hospital surplus.
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