title: 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 cost and control. Since nonprofit firms are more restricted in how they consume net revenues, they experience more rapidly diminishing value of a dollar saved, and they are less attracted to a low-cost but low-control outsourcing opportunity than a for-profit firm is. This difference is exaggerated in services where the benefits of controlling the details of production are particularly important but minimized when a fixed-cost shock raises the marginal value of a dollar of cost savings. We test these predictions in a panel of California hospitals, finding evidence for each and that the set of services that private non-profits are particularly interested in controlling (physician-intensive services) is very different from those than public hospitals are particularly interested in (labor-intensive services). 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.
authors.affiliation: Wake Forest University, 204B Kirby Hall, Winston-Salem, NC 27109, United States. Electronic address: tina.marsh.dalton@gmail.com.
authors.forename: Christina Marsh
authors.initials: CM
authors.lastname: Dalton
authors.affiliation: John E. Walker Department of Economics, Clemson University, 222 Sirrine Hall, Clemson, SC 29634, United States. Electronic address: patrick.lee.warren@gmail.com.
authors.forename: Patrick L
authors.initials: PL
authors.lastname: Warren
mesh_terms: D003365:Costs and Cost Analysis; D016304:Hospitals, Private / Q000191:economics*; D006779:Hospitals, Public / Q000191:economics*; D020416:Outsourced Services; D010067:Ownership; D014481:United States
keywords: Hospital ownership; Hospitals; Make-or-buy; Nonprofit firm behavior; Outsourcing; Public versus private