The Impact of Privatization: Evidence from the Hospital Sector
Privatization has been shown to increase growth and profitability of public firms. However, effects on consumers are understudied. We study potential trade-offs in the US hospital sector where public control declined by 42% over 1983–2019. Private operators may improve hospitals’ financial performance, but a focus on profitability may adversely affect access to care for certain patients. Using national data across all hospitals and patients, we study 258 hospital privatizations over the 2000–2018 period. Private operators improve profitability so that hospitals generate a modest surplus, primarily by increasing mean revenue per patient. However, this is partly achieved by differentially reducing the intake of low-income Medicaid patients, who are typically less profitable than other groups due to lower reimbursement rates. While other patients appear to be absorbed by neighboring hospitals, Medicaid patients experience an aggregate decline in utilization at the market-level, which we interpret as a decline in access to care. Hospital privatization therefore partially offsets the benefits of providing publicly funded health insurance through Medicaid, and our estimates imply it is quantitatively important. The aggregate decline in Medicaid volume is detected only in more concentrated hospital markets, suggesting market power is a key driver.
We would like to thank Reigne Dadey, Dante Domenella, Emma Hou, and Megan Olomu for outstanding research assistance. We received helpful comments and suggestions from Diane Alexander, Joe Bruch, David Card, Yiqun Chen, Janet Currie, Jetson Leder-Luis, Felix Tintelnot, Boris Vabson, and participants at the Harvard-MIT-BU health economics seminar, UC Berkeley, University of Pennsylvania, Western Michigan, University of Chicago, Stanford University, Tshinghua University, Collegio Carlo Alberto, Bocconi University, National Tax Association, APPAM, ASHEcon, and the Midwest Health Economics annual conferences.
All remaining errors are our own. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.