Converting Hospitals from Not-for-profit to For-profit Status

David M. Cutler, Jill R. Horwitz

NBER Working Paper No. 6672
Issued in August 1998
NBER Program(s):   HC

Over the past twenty-five years, about 330 (7 percent) of the country's 5,000 not-for-profit hospitals have converted to for-profit form This paper explores the causes and effects of conversions through two case studies -- Wesley Medical Center in Wichita, Kansas and the Columbia/HealthOne system in Denver, Colorado. We identify two primary explanations of why hospitals convert: financial concerns and board culture-perceived mission. Financial concerns are multifaceted and include expectations about future profits, anticipated problems servicing debt, and pessimism regarding the future of government reimbursement policies. The effects of these conversions are mixed. There are some efficiencies associated with conversions such as cost-cutting, increased access to capital, and debt-burden relief. However, profits are often derived from increasing reimbursement from the public sector. Further, conversions are likely to cause fragmentation of the hospital market between rich and poor. The results show that not-for-profit hospitals are likely to copy the undesirable behavior of for-profit hospitals in their markets.

(1477 K)

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Published: The Changing Hospital Inudstry: Comparing Not-for-Profit and For-Profit Institutions, Cutler, David M., pp. 45-79, (National Bureau of Economics Research, 2000).

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