An examination of the differences between nonprofit and for-profit hospitals: Market power and antitrust implications

Representatives of nonprofit hospitals have argued in recent merger cases that since nonprofit organizations are prohibited by law from distributing profits that nonprofit hospitals have less incentive to exercise market power than for-profit hospitals. This argument, referred to here as the “intent defense,” implies that antitrust law should be applied more leniently in merger cases involving nonprofits. This dissertation examines the validity of this defense.; Part I presents a theoretical analysis of nonprofit hospital behavior, focusing on two competing views of who controls these organizations. The first view is that a nonprofit hospital's trustees control the hospital and they ensure the hospital acts as a “consumer cooperative” that seeks to maximize consumer welfare. The second view is that physicians control the hospital, so that the hospital acts as a “physician cooperative” that seeks to maximize physician incomes. The results show that physician cooperative responds to increased market power in a manner that is almost indistinguishable from a for-profit hospital, while the consumer cooperative does not respond to increased market power. The intent defense is therefore only valid if the consumer cooperative model is a more accurate description of nonprofit hospital behavior.; Part II employs a logit model of consumer hospital choice in Oregon during 1991–94 to test whether consumers have a preference for nonprofit or for-profit hospitals. The estimation allows for hospital-specific fixed effects, and corrects for spatial correlation in consumer choices. A result that consumers prefer for-profit hospitals is consistent only with a physician cooperative model. However, the results indicate that consumers prefer to receive treatment at nonprofit hospitals. This result is consistent with either model of nonprofit hospital behavior.; Part III examines how market power impacts physician practice patterns by examining cesarean section rates in Oregon during 1991–94. The results show that cesarean section rates are positively correlated with market concentration at nonprofit hospitals, and negatively correlated at for-profit hospitals. These results are consistent with the theory developed in Part I for the for-profit hospital and physician cooperative. This suggests that the physician cooperative model is a more accurate description of nonprofit hospital behavior.