Are Nonprofits Efficient? A Test Using Hospital Market Values

Abstract

While the theoretical literature hypothesizes that nonprofit hospitals are less efficient than for-profits, empirical cost comparisons have been confounded by difficult to measure controls like quality. We bypass this problem by comparing hospital market values measured by sales prices. We ask whether the market for corporate control views nonprofits as less efficient than for-profits? We also address concerns that nonprofit hospitals sell to for-profits at "too low" a price. We find that the market for hospitals is competitive and therefore nonprofit hospitals are not sold at "too low" a price, and that the market values nonprofits as efficiently as for-profits.

Keywords: hospital mergers, health care, market valuation, Tobin's q, nonprofit, firm efficiency

JEL Classification: D2, G34, H42, I1, L2, L3, L8