HOSPITALS AND THE CHOICE OF ORGANIZATIONAL FORM

A dynamic model of the hospital industry is developed in which the current dominance of the nonprofit form is explained by that form's historical advantages. Then, in a more detailed analysis of the US hospital industry, it is shown that the agency-contract failure model provides a satisfactory...

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Bibliographic Details
Published in:Financial accountability & management 1987-10, Vol.3 (4), p.343-366
Main Author: Foster, Richard W
Format: Article
Language:English
Subjects:
Agents
Contracts
Donations
Equity capital
Failure
Maximization
Motivation
Nonprofit hospitals
Nonprofit organizations
Utility
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Summary:A dynamic model of the hospital industry is developed in which the current dominance of the nonprofit form is explained by that form's historical advantages. Then, in a more detailed analysis of the US hospital industry, it is shown that the agency-contract failure model provides a satisfactory explanation for the historical dominance of the nonprofit form in this industry. It is argued that, while the agency-contract failure explanation is valid historically, federal legislation in the mid-1960s drastically reduced the motivation for donations to hospitals, thus undermining it as a current explanation. Access to equity capital is held to be a key factor in the transition of organizational forms in the hospital industry. The limitations of this device are discussed, and other change mechanisms also are noted. The analysis supports the agency theory model of the choice of organizational form and draws attention to the relatively neglected issue of incentives to abandon the nonprofit form once the original motivation for its choice is gone.
ISSN:0267-4424
1468-0408
DOI:10.1111/j.1468-0408.1987.tb00054.x