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 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.