Quality in healthcare: can nonprofits help?
OR: Tips for your Christmas shopping via nonprofit structure
It’s Christmas list season! Have you ever forgone the list, trusting Great Aunt Mabel will manage somehow? Only to end up with a solitary jar of onion salt or a nose flute? Since you’re not involved in the process and can’t monitor her Christmas shopping, you may end up with suboptimal outcomes for your wishes. This is called a ‘principal-agent’ problem: when a process is made difficult because an ‘agent’ (Aunt Mabel) acts on behalf of a ‘principal’ (you). If the agent and principal’s intents differ, or the principal can’t monitor the agent’s actions, then outcomes won’t match the principal’s original intent. Hence the nose flute.
Quality in healthcare faces the same problem. Previously, we saw that meaningful quality data is scarce outside of hospital settings, and that patients cannot effectively evaluate or monitor quality on their own. The problem is that high quality care is expensive. For example, raising staffing ratios, lowering patient volumes, or upgrading technology are all costly to implement. However, if patients cannot monitor quality levels, this creates tantalizing incentives to cut quality. In this case, the principal is the patient and the provider is the agent calling the shots. How can we make sure the agent’s intentions are aligned with the principal? While I do not have a solution for your Aunt Mabel, one solution in healthcare is nonprofit status.
There are three key differences between nonprofits and for-profits that may help improve the principal agent problem:
1. Nonprofits can receive tax-exempt donations.
2. Nonprofits do not have shareholders. Instead, they answer to a Board of Trustees, individuals chosen for their interest and expertise in the nonprofit’s mission.
3. Nonprofits can still make profit, but it must be reinvested in the organization or its workers. This contrasts with for-profits, where profit is redistributed to its shareholders.
1. Nonprofits can receive tax-exempt donations.
When you buy a pair of jeans, you pay before fully knowing their quality. On the other hand, if a restaurant meal is lousy, you have some recourse of leaving a measly tip. Donations are like a super-sized tip. Just like restaurant service, super-sized revenue arriving only after service creates incentives for quality during care. My research in hospice care found that donations play a key role differentiating service in nonprofit versus for-profit hospices.1 Donations, in the form of bequests, memorials, or honorariums, are an important source of income for hospices. The Hospice Association of American reported that over 37 percent of funding in 2009 was through fundraising, and other studies have found that donations account for 14-19% of revenues for nonprofit hospices.2 A high-quality experience under hospice care increases the likelihood and size of bequests and donations after a patient passes. Our work found that nonprofit hospices rely heavily on this channel compared with for-profit hospices who instead cater to populations where donations are less likely.3
Donations won’t influence quality as effectively for large health entities such as hospitals or health care systems, since donations in these settings tend to be major single-donor gifts. Here, donations may support a cause the public cares about that wouldn’t be profitable otherwise, such as charity care or outreach to underserved communities. But donations’ ineffectiveness for service quality in these settings leads us to another possible solution.
2. Nonprofits have a Board of Trustees instead of shareholders.
Instead of shareholders who expect a steadily growing dividend payout, nonprofits must answer to a committee of individuals chosen for their interest and expertise in the nonprofit’s mission. How can this help? Nursing homes illustrate our concern for monitoring quality in healthcare. Your loved one is in a nursing home precisely because she requires higher levels of care than you can provide at all hours of the day. However, you cannot monitor the quality of care as closely either. If quality is expensive for a nursing home because of better staff ratios or more time spent with patients, you might be concerned that a for-profit facility could cut quality to increase profits. Family members prefer a nonprofit who answers to a board of mission-driven community leaders rather than shareholders solely motivated to cut costs. For large, multifaceted providers such as hospitals, mission-driven board members may also value quality or marks of excellence. However, defining excellence in a large health system could have competing goals, such as academic prestige in organ transplant science or nationally known cancer care. Both of these may be irrelevant to a run-of-the-mill patient/`principal’ with heart failure symptoms, For these cases, how can we find an ‘agent’ more closely connected to patient/ ‘principal’?
3. Nonprofit profit must be reinvested in the organization or its workers.
Can nonprofits make profit? Absolutely! For example, New York Presbyterian Hospital reported $498 million in income on its 2023 tax reports.4 The hangup for nonprofits is that this profit does not belong to shareholders. Instead, profits must be “reinvested” back into the organization in some manner. Granted, this may end up as marble lobbies or generous compensation packages for administrators, but it also creates an opening in the power structure formerly occupied by shareholders.
Highly skilled workers within the organization, especially physicians, often claim this space to wrest more control over operations. Without shareholders’ sway, physicians gain greater influence. Taking this idea to the limit, physicians may only hold admitting rights to a hospital—meaning they are not employed or receiving any direct payments from the hospital. Yet, an admitting physician is permitted to perform services using hospital resources. As a result, physicians tend to prioritize high-quality facilities who implement best clinical practices. Both these goals align with yours as the patient/‘principal.’
An illustration of the benefits of increased physician power is my research on nonprofit versus for-profit hospitals in California. We examined the propensity of a hospital to outsource its services as a measure of how much control the hospital maintained over its own quality. Nonprofits were much less likely than for-profits to outsource key medical services that were physician intensive, such as cardiology or emergency services.5
If helping Aunt Mabel’s improve her Christmas gift-giving is important, how much more important should it be to get our health care right? You can’t always monitor Aunt Mabel, but now you are armed with some better information on how to solve this problem in health services. For some of your wishes, add nonprofit status to your wishlist!
Christina Marsh Dalton, W. David Bradford, “Better together: Coexistence of for-profit and nonprofit firms with an application to the U.S. hospice industry,” Journal of Health Economics, Volume 63, 2019, Pages 1-18.
K. Noe, D.A. Forgione, Charitable contributions and quality in the U.S. hospice care setting, J. Public Budget. Acc. Financ. Manag., 26 (4) (2014), pp. 539-556.
Guo, M., Guo, L. & Li, Y. Nonprofit behavior altered by monetary donations: evidence from the U.S. hospice industry. Eur J Health Econ 25, 207–220 (2024). https://doi.org/10.1007/s10198-023-01571-0
Check out my podcast with this lively and brilliant coauthor: Dr. W. David Bradford and the health economics of Bruce Springsteen.
Christina Marsh Dalton, Patrick L. Warren, Cost versus control: Understanding ownership through outsourcing in hospitals, Journal of Health Economics, Volume 48, 2016, Pages 1-15.