The Consequences of Regulating Ownership for Profitable Tax-Exempt Organizations
Abstract
Many tax-exempt hospitals generate substantial profits. At the same time, regulations governing tax-exempt status prohibit these organizations from issuing equity or operating for the benefit of private owners, leaving managers with unusual discretion over retained resources. This combination makes them especially prone to agency problems. Because hospitals play a central role in the U.S. economy, the costs of weak governance extend beyond the sector itself. We find that tax-exempt hospitals spend more on administrative wages and capital investments than comparable taxable hospitals. At the same time, weaker financial performance accompanies greater mission-related activity. A novel, hand-collected measure of additional state-level oversight reveals that stronger oversight disciplines finances without crowding out mission-related activity. Data Availability: The data used in this study are derived from publicly available sources. Hospital financial and operational data are from the Centers for Medicare and Medicaid Services’ Hospital Cost Report Information System (HCRIS). County-level demographic data are from the Area Resource File maintained by the U.S. Department of Health and Human Services. Hospital market definitions are from the Dartmouth Atlas of Health Care. The hand-collected measure of state-level oversight (the O-Score) is described in the manuscript and appendices.
- DOI
- 10.2308/tar-2023-0208
- Pages
- 1-30
- Language
- en
- Sources
- crossref