Nonprofit Versus For-Profit Health Care Competition: How Service Mix Makes Nonprofit Hospitals More Profitable

Abstract

This article studies the intersection between the largest U.S. industry—health care—and the $1 trillion nonprofit sector. Using analytical and empirical analyses, the authors reveal the marketing strategies helping private nonprofit hospitals achieve higher output, prices, and profits than for-profit hospitals. Nonprofit hospitals, focusing on both profits and output, obtain these outcomes by expanding their service mix with high-priced premium specialty medical services (PSMS), whereas for-profit hospitals can be more profitable with higher prices for basic services. Competition increases the differences between nonprofit and for-profit hospitals in PSMS breadth, output, and prices. Nonprofit hospitals lose their competitive advantage when competing with other nonprofits; that is, presence of a for-profit competitor broadens available nonprofit PSMS. With broader service mixes, nonprofits focus more on national advertising than for-profits because PSMS (e.g., pediatric trauma, neurosurgery, heart transplants, oncology) require larger geographic markets than local basic services (e.g., laboratory, diagnostics, nursing, pharmaceutics). Exogenous, heterogeneous state regulations restricting for-profit hospital entry help econometric identification (i.e., markets prohibiting for-profits act as controls). Service mix may be a key difference between nonprofit and for-profit hospitals.

Hospital Portfolio Strategy and Patient Choice

“…Our tests (see Figure 8) reveal that focused nonprofit hospitals indeed have a significantly larger demand effect than their for-profit counterparts. While differences in demand effects are nonsignificant for related focus, the differences in the demand effects of focus across for-profit and nonprofit hospitals parallel the findings in Moon and Shugan (2020). Specifically, Moon and Shugan note that private nonprofit hospitals achieve higher output, prices, and profits than for-profit hospitals, and these differences may be attributed to differences in their service mix.…”

Relative Productivity of For-Profit Hospitals: A Big or a Little Deal?

“…Moon and Shugan (2020) documented that high-priced specialty services, for example, Level III burn care, oncology, critical intensive care, are important sources of NFP hospital profitability. Such services are more likely to be provided by NFPs as FP hospital presence in the market increases—results confirmed by Bayindir and Schreyögg (2021).…”

The contested nature of third-sector organisations

“…Focusing on formal non-profit management papers also shows a wide array of outlets where researchers publish their results, with the risk of being unnoticed by the non-profit research community. To give an example: as far as we can ascertain, there are three theoretical papers on the impact that competing with for-profit organisations has on the strategic decision-making of NPO s. They are published in the Journal of Public Policy and Marketing, the Journal of Marketing Research and the Journal of Institutional and Theoretical Economics, respectively (Liu and Weinberg, 2004;Moon and Shugan, 2020;Stenbacka and Tombak, 2020). A formal paper comparing strategic decision-making between NPOs and for-profit organisations can be found in Health Economics (Banks et al, 1997).…”