For-profit vs. non-profit

You get how I use this blog, right? Here I am doing my paid work (you know, perfecting the health system :)). As I do that, I’m reading stuff I want to make use of later. I put up posts like this one to help me assimilate what I’ve read and to keep track of it. There seems to be a positive externality by making this process public. What I’m reading is related in some way to my actual work, so you can make inferences from what I post about what I’m studying now and what some of the ideas will be in my future publications. In short, this blog is my notebook.

Sometimes I read a paper for its methods and the actual application is not related to what I’m studying. That’s true of the very well written 2007 article in Inquiry by Santerre and Vernon. It’s about the value of a mix of for-profit and non-profit nursing homes. I’m reading it for the way they handle the endogeneity of non-profit nursing home market share. But never mind that for now. There is something else interesting about it, as I’ll explain.

The authors draw inferences based on the observed relationship between quantity of nursing home use and non-profit market share, controlling for other supply and demand factors. A positive correlation implies that an increase in non-profit market share enhances consumer welfare; a negative correlation implies non-profits are overrepresented. They find a positive correlation. More non-profit nursing home market participation would increase consumer welfare by enhancing quality norms, though there are diminishing returns. For-profits play a useful role too. With their focus on cost efficiency and in competition with non-profits, they put downward pressure on price.

What’s interesting is that this work suggests the need for a hybrid system, one that has a good mix of for- and non-profits. Purity is not optimal. We need non-profits to boost quality in the market and for-profits as a check on price. There is also heterogeneity in consumer preference so a mix facilitates better matching of product characteristics to consumer demand.

The article references other, related work.

It should be noted that we are not alone in using quantity adjustments as a barometer of consumer welfare in the health care industry. For example, Abraham, Gaynor, and Vogt (2005) use quantity information to view how the market entry of new hospitals affects consumer welfare. They find that entry of the second and third firms increases quantity, which allows them to infer that market entry increases consumer welfare in the hospital services industry. Santerre and Vernon (2006) use information on the use of various types of hospital services to infer how ownership mix affects consumer welfare. They find that from a consumer perspective, nonprofit hospitals are over-represented in the inpatient sector, whereas for-profit hospitals are over-represented in the outpatient sector of the typical hospital services market.

In a 2003 JHE article, Grabowski and Hirth used related methods for addressing the endogeneity of non-profit market share. They also find that the presence of more non-profit nursing homes improves overall quality–including that provided by competing for-profit institutions.

Finally, a related and more broadly accessible 2006 Health Affairs paper by Schlesinger and Gray titled “How nonprofits matter in American medicine, and what to do about it” makes for good further reading. I may comment on it in a future post.


Abraham, J. M., M. S. Gaynor, and W. B. Vogt. 2005. Entry and Competition in Local Hospital Markets. National Bureau of Economic Research (NBER) Working Paper 11649. Cambridge, Mass.: NBER. [See also the Journal of Industrial Economics version.]

Santerre, R. E., and J. A. Vernon. 2006. The Consumer Welfare Implications of the Hospital Ownership Mix in the U.S.: An Exploratory Study. Health Economics 15(11):1187–1199.

Hidden information below


Email Address*