Converting Hospitals from Not-for-Profit to For-Profit Status

56 Pages Posted: 8 Sep 1998 Last revised: 10 Oct 2010

See all articles by David M. Cutler

David M. Cutler

Harvard University - Department of Economics; National Bureau of Economic Research (NBER); Harvard University - Harvard Kennedy School (HKS)

Jill R. Horwitz

UCLA School of Law; National Bureau of Economic Research (NBER)

Date Written: August 1998

Abstract

Over the past twenty-five years, about 330 (7 percent) of the country's 5,000 not-for-profit hospitals have converted to for-profit form This paper explores the causes and effects of conversions through two case studies -- Wesley Medical Center in Wichita, Kansas and the Columbia/HealthOne system in Denver, Colorado. We identify two primary explanations of why hospitals convert: financial concerns and board culture-perceived mission. Financial concerns are multifaceted and include expectations about future profits, anticipated problems servicing debt, and pessimism regarding the future of government reimbursement policies. The effects of these conversions are mixed. There are some efficiencies associated with conversions such as cost-cutting, increased access to capital, and debt-burden relief. However, profits are often derived from increasing reimbursement from the public sector. Further, conversions are likely to cause fragmentation of the hospital market between rich and poor. The results show that not-for-profit hospitals are likely to copy the undesirable behavior of for-profit hospitals in their markets.

Suggested Citation

Cutler, David M. and Horwitz, Jill R., Converting Hospitals from Not-for-Profit to For-Profit Status (August 1998). NBER Working Paper No. w6672. Available at SSRN: https://ssrn.com/abstract=123248

David M. Cutler (Contact Author)

Harvard University - Department of Economics ( email )

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Harvard University - Harvard Kennedy School (HKS) ( email )

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Jill R. Horwitz

UCLA School of Law ( email )

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National Bureau of Economic Research (NBER) ( email )

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