Profit Incentives and Technical Efficiency in the Production of Hospital Care

Between 1970 and 1983 the proportion of gross national product devoted to hospital care nearly doubled, rising from 2.8 percent to 4.5 percent. During the same period, the average annual percentage change in the hospital room component of the consumer price index was 11.9 percent. Beyond such performance indicators, the hospital industry has been undergoing significant structural changes in the way in which hospital care is provided. One important structural change has been the growth of for-profit hospitals. In 1960, only 2.2 percent of hospital beds were controlled by for-profit hospitals. By 1982, the proportion of for-profit beds had risen to 7 percent. Overlooking the sociological implications, many health care analysts have suggested that a continued movement in the direction of profit incentives in the production of hospital care might significantly improve the industry's perceived lackluster economic performance [5; 7]. These individuals, arguing from the theory of property rights, believe that the nonprofit hospital is inherently inefficient because no individual's income is tied to economic performance. Furthermore, it is believed that the nonprofit hospital administrator may cause the hospital to pursue goals other than strict cost minimization [12; 20; 22]. With a partial claim to residual revenues transferred to the for-profit administrator and the ever present fear of displacement for poor economic performance, the for-profit administrator is thought to be less sensitive to the efficiency robbing behaviors plaguing the nonprofit hospital. While the theoretical case for such an outcome is relatively strong, empirically the case for superior for-profit hospital performance is unclear. The purpose of this paper is to evaluate the relationship between hospital ownership and technical efficiency in the production of hospital care. In the following section of the paper a brief literature review is presented. This review is not intended to be exhaustive, rather, it is intended to show the reader the types of hypotheses previously considered and the inconclusive nature of previous work in the area of profit incentives and the production of hospital care. Following this, the