Cost Versus Control: Understanding Ownership Through Outsourcing in Hospitals

Dalton, Christina Marsh and Warren, Patrick L. (2014): Cost Versus Control: Understanding Ownership Through Outsourcing in Hospitals.

Abstract

For-profit hospitals in California contract out services much more intensely than either private nonprofit or public hospitals. To explain why, we build a model in which the outsourcing decision is a trade-off between net revenues and some non-monetary benefit to the manager, or "bias" in the manner of production. Since nonprofit firms must consume profits under restrictions, they trade off bias and income differently than for-profit firms. This difference is exaggerated in services where the benefits of controlling the details of production are particularly important but minimized when firms are hit with a fixed-cost shock. We test these predictions in a panel of California hospitals, finding evidence for each. These results suggest that a model of public or nonprofit make-or-buy decisions should be more than a simple relabeling of a model derived in the for-profit context.

• Item Type: MPRA Paper
• Language: English
• Keywords: Hospitals, Make-or-Buy, Public versus Private, Nonprofit Firm Behavior
• Subjects: L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L22 - Firm Organization and Market Structure; L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L24 - Contracting Out ; Joint Ventures ; Technology Licensing; L - Industrial Organization > L3 - Nonprofit Organizations and Public Enterprise > L33 - Comparison of Public and Private Enterprises and Nonprofit Institutions ; Privatization ; Contracting Out

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