Cost versus control: Understanding ownership through outsourcing in hospitals

Christina Dalton and Patrick Warren

Journal of Health Economics, 2016, vol. 48, issue C, 1-15

Abstract: For-profit hospitals in California contract out services much more intensely than either private nonprofit or public hospitals. To explain why, we build a model in which the outsourcing decision is a trade-off between cost and control. Since nonprofit firms are more restricted in how they consume net revenues, they experience more rapidly diminishing value of a dollar saved, and they are less attracted to a low-cost but low-control outsourcing opportunity than a for-profit firm is. This difference is exaggerated in services where the benefits of controlling the details of production are particularly important but minimized when a fixed-cost shock raises the marginal value of a dollar of cost savings. We test these predictions in a panel of California hospitals, finding evidence for each and that the set of services that private non-profits are particularly interested in controlling (physician-intensive services) is very different from those than public hospitals are particularly interested in (labor-intensive services). These results suggest that a model of public or nonprofit make-or-buy decisions should be more than a simple relabeling of a model derived in the for-profit context.

Keywords: Hospitals; Make-or-buy; Public versus private; Nonprofit firm behavior; Outsourcing; Hospital ownership (search for similar items in EconPapers)
JEL-codes: I11 L24 L33 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Related works:
Working Paper: Outsourcing Intensity and Ownership: Theory and Evidence from California General Care Hospitals (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jhecon:v:48:y:2016:i:c:p:1-15

DOI: 10.1016/j.jhealeco.2016.02.003

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