Do Nonprofit and For-profit Organizations Respond Differently to Incentives? Behavior in the Mixed Hospice Industry (WP-05-13)


Burton A. Weisbrod and Richard Lindrooth

Strong selection incentives exist in many institutionally-mixed industries. We examine such an industry, hospices, where there are strong financial incentives, due to the Medicare pricing system, to maximize patients’ expected lengths of stay. We examine the responses of for-profit and nonprofit organizations to these incentives, using a unique data set consisting of all urban Medicare admissions at for-profit and religious nonprofit hospices in 1993. The hospice industry is ideal for testing whether the response to selection incentives differs by ownership. First, provider selection of patients would be based on expected length of stay, which can be estimated using observable patient characteristics. Second, curative care is not reimbursed, and so the length of stay is unlikely to be affected by endogenous provider behavior subsequent to admission. Third, competition is local, and most markets have both for-profit and nonprofit hospices—which allows us to take advantage of variation within the market for identification. Fourth, price is exogenous and marginal costs are largely homogenous within a given disease category.

We find that, as expected, for-profit hospices are more responsive to the incentive to attract longer-stay patients. For-profits have significantly longer average lengths of patient stay: They are significantly less likely to admit patients with short expected lengths of stay, and they admit patients sooner after hospital discharge. We posit that the mechanism through which these results occur involves limiting the provision of services that would be attractive to patients with diagnoses associated with short life expectancies. In addition, selective marketing of the hospice will likely lead to early admissions and disproportionate admissions of patients with longer life expectancies. Finally, we show the behavior in the industry is consistent with a model of nonprofit organization behavior in which nonprofits maximize profit on profitable patients to subsidize care of unprofitable patients and thus, to satisfy their mission.

Burton A. Weisbrod, John Evans Professor of Economics; Faculty Fellow, Institute for Policy Research, Northwestern University
Richard Lindrooth, Professor of Health Administration and Policy, Medical University of South Carolina

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