The Changing Hospital Industry: Comparing Not-for-Profit and For-Profit Institutions (review)

David M. Cutler, ed.The Changing Hospital Industry: Comparing Not-for-Profit and For-Profit Institutions. National Bureau of Economic Research Conference Report. Chicago: University of Chicago Press, 2000. 384 pp. $53.00.

In the face of rapid technological change and the rise of managed care, the period since 1980 has been one of major change for the U.S. hospital industry. During the early 1980s, hospital inpatient occupancy rates fell sharply, followed by a gradual reduction in inpatient beds and the number of community hospitals. Overall, however, it has been a period of transition rather than contraction for the hospital industry. Although growing less rapidly than other types of health care spending, hospital expenditures rose as a share of GDP from 3.6 percent in 1980 to 4.3 percent in 1998 (National Center for Health Statistics 2001). Accompanying this growth have been important changes in the mix of services and industry organization. Only 13 percent of hospital patient revenue came from outpatient services in 1980, but by 1999 this share was 34 percent (American Hospital Association 2001). At the same time, hospital system membership has grown rapidly, especially for-profit hospitals, while the choice of organizational form between for-profit and not-for-profit—the focus of this National Bureau of Economic Research (NBER) conference volume—has emerged as an important issue.

For-profit hospitals account for only a small share of nonfederal community hospital spending, growing slightly from 7 percent of total spending in 1980 to 9 percent in 1999. This compares with 74 percent for private not-for-profits, up from 72 percent in 1980, and 16 percent for public hospitals, down from 20 percent in 1980 (National Center for Health Statistics 2001). However, for-profit growth has attracted widespread attention for several reasons. Philosophically, for-profits' mission—to make money—contrasts sharply with the stated missions of public and private not-for-profits, typically to provide community service. Moreover, both for-profit's share of total spending and the number of for-profit hospitals and beds have increased at a time when the number of not-for-profit hospitals and beds has been declining, especially for public hospitals. Finally, for-profit growth has been accompanied by the emergence of large, highly visible national for-profit hospital systems and a wave of conversions from not-for-profits to for-profit status in the 1980s and again in the mid-1990s.

The mix of ownership forms in the industry raises two basic questions. First, what determines the choice of organizational form for hospitals between private not-for-profit, public and for-profit ownership and how have changes in the environment in which hospitals operate influenced decisions? Second, how does the choice of organizational form affect patients and society? A more general issue is how changing market conditions, particularly managed care, have impacted on hospital behavior.

Edited by David M. Cutler and based on a 1997 NBER conference, The Changing Hospital Industry brings together a selection of ten papers that draw on empirical analysis and case studies to address these questions from a broad range of perspectives. As Cutler notes in his introduction, key considerations in the choice of organizational form for hospitals include underlying concerns about agency problems and asymmetric information, the provision of public goods, and access to capital. At the same time, interests of major stakeholders, including administrators, staff, trustees, and community leaders, may play a central role, while decisions may impact directly on not only the cost and quality of care, but also on public budgets and tax revenues.

Reflecting these themes, papers and accompanying comments by conference respondents are organized into four sections. Papers in section 1 focus on the causes and effects of hospital conversions. In chapter 1, Frank Sloan, Donald Taylor, and Christopher Conover utilize data from North and South Carolina for 1981...