An Investigation of Economic Efficiency in California Hospitals

Abstract

This paper investigates variations in hospital behaviors and performance outcomes due to ownership type. Conventional economic theory predicts economic efficiency benefits from for-profit control type; however, a broad review of hospital performance literature provides empirical evidence that primarily favors nonprofit hospitals. This paper extends a theoretical model of nonprofit hospitals and develops hypotheses that predict nonprofit hospitals perform better in terms of price, cost, and service volume when compared to for-profit hospitals. Specifically, private nonprofit hospitals provide the highest volume of patient services, whereas public hospitals offer the lowest average price for a comparable service among all hospitals. Examination of a short-term, general acute care hospital sample from the state of California generally supports such conjecture. Managerial implications are also discussed.