Firm ownership form and quality: An examination of the impact of the Balanced Budget Act of 1997 on hospitals

This doctoral dissertation concerns the economic study of non-profit (NP) and for-profit (FP) hospital behavior immediately after the passage of the Balanced Budget Act of 1997 (BBA). Although there is a wealth of research elucidating differences between the quality of products or services established by non-profit firms and quality by for-profit firms, not much work has addressed whether fundamental differences exist between changes in quality due to exogenous factors. Non-profit firms have been flourishing in many industries, particularly medical services; yet few major studies have addressed the welfare implications of so-called "non-profits," which, as an obvious alternative to for-profits, can also be viewed as alternative to other policy interventions to correct market failures in the health care industry because of favorable tax treatment of non-profits. The BBA, which affected the revenues of hospitals through reimbursement cuts, provides an opportunity to study whether medical care quality changed and whether adjustments differed by ownership form. In this thesis, we investigate the differential quality response by ownership form to a change in revenue. The BBA was an exogenous source of variation in revenue change across hospitals. The impact on revenue was variable across hospitals. Both patient discharge data for two types of emergent conditions (heart attacks and in-hospital complications) and audited annual data of California hospital characteristics are at our disposal to carry out these research aims. First, we conclude that differences in the way FP hospitals and NP hospitals respond to changes in regulated reimbursement rates in medical services exist, as demonstrated by the observed response to the BBA. Second, there appears to be relative decreases in the change in quality associated with the magnitude to which the hospital's revenue was exposed to the BBA policy. If fiscal pressure and ownership form matter, then future efforts to rein in health care costs through similar policies could be informed by our empirical results.