Control Without Ownership: Governance of Nonprofit Hospitals

We provide a comprehensive analysis of the governance structures of nonprofit hospitals and hospital systems. We study both the internal governance mechanisms (boards of directors, incentive contracts) and external mechanisms (market for corporate control, government oversight), with particular focus on the latter. Nonprofit boards are unusually large, include employee directors, exhibit less industry expertise among outside directors, and face weak external oversight. CEO pay and turnover are largely unresponsive to non-financial metrics such as quality or charity provision. The disciplinary role of the market for corporate control is also weaker in the nonprofit sector: nonprofits with poor financial performance are half as likely to be acquired or closed as for-profits, and weak performance on non-financial metrics has no effect on acquisitions or closures. Using time-series and cross-sectional variation in state oversight of nonprofits, we find that oversight strength explains a substantial portion of the gap in takeover rates between for-profits and nonprofits. We conclude that nonprofit governance structures lack the attributes traditionally associated with “good governance.”