What do not - for - profit hospitals maximize ?

Massive structural change is occurring in health care provision in the United States, significantly reducing the number of not-for-profit suppliers. This trend is fueled in part by government policies. To evaluate these policies one must know about the motives of not-for-profit health care providers. The theory of not-for-profit hospitals suggests buyers may prefer dealing with sellers who are not acting out of avarice. Yet, this theory does not imply the absence of rent seeking motives. We formulate a test of not-for-profit hospitals’ goals and apply it to hospitals in Virginia. Modeling average revenues as a function of caseload (private, Medicare, Medicaid, charity), we identify prices as latent variables. By analyzing the response of the estimated private price to exogenous differences in Medicare, Medicaid and charity caseload, we reject the hypothesis that not-for-profit hospitals maximize profits (i.e. maximize rents for a set of agents who ‘control’ the hospital). We also reject pure welfare (output) maximization. These results, combined with other evidence we discuss, are consistent with the hypothesis that these hospitals consider both profits and output as objectives. Current US government policies treat all not-for-profit hospitals as if they were profit maximizers. These policies appear to be biased towards reenforcing the trend towards less health care provision from not-for-profits, and our results suggest that this may not be entirely beneficial to consumers.  2002 Elsevier Science B.V. All rights reserved. JEL classification: L31; L21; I11