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HealthCare Services: Nonprofit vs For-Profit Competition
Authors: Jihwan Moon (University of New South Wales), Steven M Shugan (University of Florida, USA)
Our large healthcare database reveals marketing strategies that help private nonprofit hospitals achieve higher prices and larger profits than for-profit hospitals. Prior theoretical research suggests that nonprofits forego better profits for greater output, achieved with lower prices. In contrast, our analytical and empirical analyses reveal that nonprofits obtain higher (not lower) prices and larger (not smaller) profits by expanding their service mix to high-priced premium specialty medical services (PSMS). However, non-profits have lower prices for basic services. Unlike prior empirical research that explores nonprofit vs. for-profit quality, we consider differences in service mix. We find, contrary to prior research, that greater competition increases differences in output. We also find that nonprofits, with a broader PSMS mix, spend more on national advertising than for-profits because the PSMS (e.g., epilepsy, tomography, oncology, neurosurgery services) require larger geographic markets than basic services that tend to be local (nursing, laboratory, diagnostic, physician-assistance). Our empirical analysis benefits from exogenous heterogeneous state regulations restricting for-profit hospital entry, allowing unique identification. Service mix may be the key difference between nonprofits and for-profits. Some of our findings include:
Our analytical predictions concerning how increased competition affects healthcare markets are consistent with our large integrated health-care database compiled from multiple sources.
Like prior research, we confirm nonprofits seek greater output than for-profits and increased competition increases output.
Contrary to prior research, we find nonprofits can achieve greater output with higher (rather than lower) average prices than for-profits. A changing service mix to PSMS explains the difference. However, nonprofit basic service prices remain lower.
Contrary to prior research, our analytical analysis finds that nonprofits can achieve higher (rather than lower) profits than non-profits. Again, differences in service mix explains why.
Contrary to prior research, increasing competition increases the differences between nonprofit and for-profits, because greater competition causes nonprofits to broaden their service.
New to prior research, we find that the service mix influences advertising strategies as nonprofits use national media for PSMS while for-profits focus on local media for basic services.
Cross-subsidization between basic and PSMS increase the nonprofits’ competitive advantage.