Does the Profit Motive Make Jack Nimble? Ownership Form and the Evolution of the U.S. Hospital Industry

41 Pages Posted: 19 Oct 2005

See all articles by Sujoy Chakravarty

Sujoy Chakravarty

Xcenda, AmeriSourceBergen Specialty Group

Martin Gaynor

Carnegie Mellon University; National Bureau of Economic Research (NBER); Leverhulme Centre for Market and Public Organisation

Steven Klepper

Carnegie Mellon University - David A. Tepper School of Business

William B. Vogt

RAND Corporation; National Bureau of Economic Research (NBER)

Date Written: October 5, 2005

Abstract

We examine the evolving structure of the U.S. hospital industry since 1970, focusing on how ownership form influences entry and exit behavior. We develop theoretical predictions based on the model of Lakdawalla and Philipson, in which for-profit and not-for-profit hospitals differ regarding their objectives and costs of capital. The model predicts for-profits would be quicker to enter and exit than not-for-profits in response to changing market conditions. We test this hypothesis using data for all U.S. hospitals from 1984 through 2000. Examining annual and regional entry and exit rates, for-profit hospitals consistently have higher entry and exit rates than not-for-profits. Econometric modeling of entry and exit rates yields similar patterns. Estimates of an ordered probit model of entry indicate that entry is more responsive to demand changes for for-profit than not-for-profit hospitals. Estimates of a discrete hazard model for exit similarly indicate that negative demand shifts increase the probability of exit more for for-profits than not-for-profits. Finally, membership in a hospital chain significantly decreases the probability of exit for for-profits, but not not-for-profits.

Keywords: Entry, Exit, Market Structure, Hospital, Not-for-Profit, Ownership, System

JEL Classification: I11, L2, L3, L11

Suggested Citation

Chakravarty, Sujoy and Gaynor, Martin and Klepper, Steven and Vogt, William B., Does the Profit Motive Make Jack Nimble? Ownership Form and the Evolution of the U.S. Hospital Industry (October 5, 2005). Available at SSRN: https://ssrn.com/abstract=821464 or http://dx.doi.org/10.2139/ssrn.821464

Sujoy Chakravarty

Xcenda, AmeriSourceBergen Specialty Group ( email )

Princeton, NJ 08540
United States

Martin Gaynor

Carnegie Mellon University ( email )

H. John Heinz III School of Public Policy
and Management
Pittsburgh, PA 15213-3890
United States
412-268-7933 (Phone)
412-268-5338 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Leverhulme Centre for Market and Public Organisation

12 Priory Road
Bristol BS8 1TN
United Kingdom

Steven Klepper

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States
412-268-3235 (Phone)
412-268-6938 (Fax)

William B. Vogt (Contact Author)

RAND Corporation ( email )

1776 Main Street
P.O. Box 2138
Santa Monica, CA 90407-2138
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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