Ownership Form and Trapped Capital in the Hospital Industry

Abstract

Over the past 20 years, demand for acute care hospital services has declined more rapidly than has hospital capacity. This paper investigates the extent to which the preponderance of the nonprofit form in this industry might account for this phenomenon. We test whether rates of exit from the hospital industry differ significantly across the different forms of ownership, and especially whether secular nonprofit hospitals reduce capacity more slowly than do other types of hospitals. We estimate the effect of population changes (a proxy for changes in demand) at the zip-code level between 1985 and 1994 on changes in the capacity of for-profit, secular nonprofit, religious nonprofit, and public hospitals over the same period, holding constant metropolitan statistical area (MSA) fixed effects and other 1985 baseline characteristics of residential zip codes. We find that for-profit hospitals are the most responsive to reductions in demand, followed in turn by public and religiously affiliated nonprofit hospitals, while secular nonprofits are distinctly the least responsive of the four ownership types.

Keywords: nonprofit, hospitals, exit, capacity, capital, ownership, supply response

JEL Classification: G32, I11, L30