The Influence of Ownership and Compensation Practices on Charitable Activities

Recent accounting research provides evidence that similar profit-based compensation incentives are used in for-profit and nonprofit hospitals. Because charity care reduces profits, such incentives should lead for-profit hospital managers to reduce charity care levels. Nonprofit hospital managers, however, may respond differently to the same incentives because they face a different set of institutional pressures and constraints. We compare the association between pay-for-performance incentives and charity care in for-profit and nonprofit hospitals. We find a negative and significant association between charity care and our proxy for profit-based incentives in for-profit hospitals and no significant association in nonprofit hospitals. The evidence in the nonprofit sample that profit-based incentives have no significant effect on charity care levels suggests that institutional differences inherent in the nonprofit setting mitigate the negative effect of profit-based incentives on charity care