Module 9

Question 1

What is the economic definition of non profit?

Answer 1

Non-profit = no residual claimants : non profit firms face a non distributing constraint, meaning they are not allowed to distribute any surpluses (owners, stockholders,…)

Question 2

What are some examples of types of ownership in NP firms?

Answer 2

• Foundations
• Mutual companies
• Public companies

Question 3

What are some examples of types of ownership in FP firms?

Answer 3

• Proprietary companies (limited group of owners)
• Public equity firms (tradeable on the stock market, open to general public)
• Private equity firms (limited group of investors) -> venture capital or buyout firms

Question 4

How does market and government failure impact the popularity of NP firms?

Answer 4

NP firms result from underprovision of care due to these failures.
Why?
- FP firms may not want to invest in certain communities (due to insufficient prospects of a good ROI) AND governments may not be willing to invest in sparsely populated areas (due to lack of voters and limited public means)

So, communities support NP hospitals (to provide unmet demand) -> this leads NP hospitals to have a strong competitive advantage:
- access to cheap labor (e.g. volunteers)
- access to cheap capital (e.g. charity, donations)

This results in affordable prices and access to patients, especially people with limited insurance and subsidies

Question 5

How does contract failure (agency problem) impact the popularity of NP firms?

Answer 5

NP firms are a response to contract failure due to asymmetric information.
Why?
In hospital care, asymmetric information and conflicts of interests lead to P-A problems, that can be solved via appropriate contract design (which is hard to realize)

So if contracts fail, how do we align interests? With state interventions to discourage/prevent FP hospitals:
- prohibiting entrance by FP hospitals (licensing)
- subsidizing NP hospitals
- limiting access of FP hospitals to public funding

Question 6

How does physician control (interest group theory) impact the popularity of NP firms?

Answer 6

NP firms are supported by physicians to retain control over the provision of healthcare and allocation of inputs
-> a non distribution constraint may be in physicians’ interest so they can retain hospital surplus - their goal may be to maximize hospital residual per physician

Question 7

What is the theory that helps determine the performance of FP hospitals? And how?

Answer 7

Property rights theory: owners/stockholders want to maximize profits

This provides FP firms with incentives:
- to produce at lower unit costs
- to charge profit maximizing prices
- to adjust to preferences of customers
–> these incentives are higher for FP firms than for NP

Question 8

What are some sources of market failure in hospital markets?

Answer 8

• lack of adequate indicators and information
• asymmetric information between hospitals and patients
• entry barriers
• high level of market concentrations (monopoly power)

Question 9

What can market failures lead to, in FP hospitals?

Answer 9

• charging high prices (high markups)
• upcoding /e.g. classifying patients in higher DRG)
• cost reduction at the expense of quality
• risk selection (patients, locations, types of services…)