THE ECONOMICS OF NOT-FOR-PROFIT TAX STATUS FOR HOSPITALS: CALIFORNIA, 1984 TO 1994 (HEALTH CARE, PUBLIC FINANCE)

This dissertation shows that not-for-profit tax status is a regulatory good traded between hospitals and governments. This trade results in differences in services offered between not-for-profit hospitals and for-profit hospitals. The difference studied is the increasingly larger share of treatment for rare diagnoses provided by not-for-profit hospitals in California from 1984 to 1994.; As theory, not-for-profit tax status as a regulatory good means that a hospital benefits from purchasing this tax status, and a government benefits by selling it. There are two elements to the trade: the amount of additional services provided by a hospital to its community and the amount of taxes that the government levies on the hospital. The hospital benefits by increasing its profits, or increasing some other objective, when it agrees to provide additional services instead of paying the taxes. The government benefits by delivering an additional amount of services to the community more than the amount it could purchase with the levied taxes it would have collected.; Not all hospitals and governments find mutually acceptable terms for this trade in part because of local variation in prices, costs, tax rates, and the political trade-off between taxes and additional services. Therefore, there is a mixture of not-for-profit hospitals and for-profit hospitals in the industrial organization of hospitals. This theory is consistent with previously observed differences in the size, location, and services offered between not-for-profit hospitals and for-profit hospitals.; As particular evidence of this theory, not-for-profit hospitals in California from 1984 to 1994 increasingly specialized in treating rare diagnoses as compared to for-profit hospitals. Also, rare diagnoses were increasingly treated at not-for-profit hospitals and not at for-profit hospitals. Both trends are statistically significant after controlling for additional characteristics of the hospitals and the diagnoses.; The likely reason for these trends is the decrease in the prices for rare diagnoses as compared to common diagnoses in the prospective payment systems implemented during the study period. Not-for-profit hospitals, which may accept constraints to indirectly increase profits, did not reduce their ratio of treatment for rare diagnoses versus common diagnoses as much as for-profit hospitals did to directly increase profits.