Session: Caring for the Less Well Off
Room: Hollister 110
Time: Tue 10:15-11:45

Presenter: Cory Capps (Bates White. )

Discussant: Jennifer Troyer (University of North Carolina, Charlotte)

Abstract

Nonprofit institutions are required to provide socially beneficial activities in exchange for an exemption from taxation. Failure to recognize the interaction between competition and the ability to finance such socially beneficial activities may create a tension between the favored treatment of nonprofits under the tax code and their treatment under the antitrust laws. More specifically, nonprofit hospitals are expected to treat indigent patients without full compensation. Providing uncompensated care will result in negative profits, so this requires that hospitals have other, non-indigent customers that are profitable to "cross-subsidize" the uncompensated care. Hospitals operating in highly competitive markets will have little ability to price discriminate, limiting in turn their ability to cross-subsidize the provision of services to the indigent. An important implication is that, to the extent that nonprofit hospitals do in fact provide more care to the poor in the face of less competition, the antitrust laws, which are designed to promote competition, may contradict the policy rationale for granting tax exemptions to nonprofits.

If the premise that nonprofit hospitals provide more care to the poor as they face less competition is true, then the inconsistency between competition and the benefits of nonprofit status suggests that the courts should give consideration to the nonprofit status of hospitals in antitrust cases. The key underpinning of the argument for favorable antitrust treatment of nonprofits is that without the power to elevate price to some consumers, there will be little or no surplus that can be used to provide services to consumers who would otherwise have inefficiently low levels of care, such as the poor.

This paper introduces a theoretical model that highlights the potential inconsistency between competition and the benefits of nonprofit status. We show that, in the absence of sufficient direct subsidies, favorable or more lenient antitrust treatment of nonprofits may improve welfare relative to the usual antitrust enforcement. This is more likely to be the case the more inelastic demand for healthcare services for the insured patients, and the higher is the value placed by society on consumption by the uninsured. Contrary to recent work, we conclude that appropriate antitrust doctrine towards nonprofits cannot be derived solely on theoretical grounds. Moreover, we show that funding services for the poor via cross-subsidization entails deadweight loss, so a better policy would be direct subsidy to the indigent in a world where antitrust unequivocally protects competition.

We analyze a 2001-2007 panel of data on pricing, competition, and charity care provision by for-profit, nonprofit, and government hospitals in California to determine whether hospitals that face less competition provide more benefits to their communities. Our empirical results offer little support for the proposition that nonprofit hospitals with more market power use the resulting additional profits to cross-subsidize care for the uninsured. In the cases where a positive relationship between concentration and provision of charity care emerges, this relationship is not specific to nonprofit hospitals. Thus, our empirical results provide no support for the proposition that the antitrust treatment of mergers of not for profit hospitals should be more lenient than for for profit hospitals.

Key Terms

Indigent Care, Antitrust, Nonprofit Hospitals, Cross Subsidies

Authors:

Cory Capps (Bates White, LLC) , Dennis Carlton (University of Chicago. Booth School of Business) and Guy David (University of Pennsylvania. The Wharton School)