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Efficiency and profitability in US not-for-profit hospitals

Michael Rosko (), Mona Al-Amin and Manouchehr Tavakoli
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Michael Rosko: Widener University
Mona Al-Amin: Suffolk University
Manouchehr Tavakoli: University of St. Andrews

International Journal of Health Economics and Management, 2020, vol. 20, issue 4, No 2, 359-379

Abstract: Abstract This article examines the relationship between hospital profitability and efficiency. A cross-section of 1317 U.S. metropolitan, acute care, not-for-profit hospitals for the year 2015 was employed. We use a frontier method, stochastic frontier analysis, to estimate hospital efficiency. Total margin and operating margin were used as profit variables in OLS regressions that were corrected for heteroskedacity. In addition to estimated efficiency, control variables for internal and external correlates of profitability were included in the regression models. We found that more efficient hospitals were also more profitable. The results show a positive relationship between profitability and size, concentration of output, occupancy rate and membership in a multi-hospital system. An inverse relationship was found between profits and academic medical centers, average length of stay, location in a Medicaid expansion state, Medicaid and Medicare share of admissions, and unemployment rate. The results of a Hausman test indicates that efficiency is exogenous in the profit equations. The findings suggest that not-for-profit hospitals will be responsive to incentives for increasing efficiency and use market power to increase surplus to pursue their objectives.

Keywords: Hospitals; Profits; Stochastic frontier analysis; Payment policy (search for similar items in EconPapers)
JEL-codes: I1 I11 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1007/s10754-020-09284-0

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International Journal of Health Economics and Management is currently edited by Leemore Dafny, Robert Town, Mark Pauly, David Dranove and Pedro Pita Barros

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