This paper provides evidence of the growing similarity in capacity of for-profit and nonprofit hospitals. In 1960, nonprofit hospitals maintained on average more than three times as many beds per hospital as their for-profit counterparts; following a monotonic decline in relative size, by 2000, the average nonprofit hospital was only 32% larger than the typical for-profit hospital. Hospital level data for the United States indicate that the convergence was driven primarily by industry-wide effects such as entry, exit and ownership switches, rather than expansions or downsizing of existing hospitals. These findings suggest that hospitals may in fact strategically choose their ownership type (nonprofit vs. for-profit status) and hence, their regulatory environment. Accordingly, I develop a model in which firms have identical objectives but differ in their ability to benefit from a given ownership form. In contrast to the existing literature, this approach relies neither on different ownership type-specific objectives nor on market failure to generate an equilibrium in which both ownership types are chosen by a strictly positive fraction of hospitals. Changes in the economic environment alter firms' incentives to maintain a given ownership type. This in turn induces firms to modify their capacity and encourages some firms to switch their ownership type. Crowding-out of government hospitals, population growth and increasing involvement of the government in the healthcare market may account for the convergence in size. Policymakers and legislators often exert pressure on nonprofit hospitals by tying tax-exemptions to hospital-level measures of community benefits such as free care for the indigent. I argue that by omitting industry-wide effects of a hospital's tax-exempt status on price and industry output, such pressure may both lead to convergence in size and be welfare decreasing. Analysis at the state and Metropolitan Statistical Area (MSA) level as well as at the hospital level corroborate the principal theoretical predictions.

Theoretical models that were developed in the 1970's predict large differences in behavior between for-profit and nonprofit hospitals, while recent empirical studies have consistently failed to detect these differences. This paper attempts to solve this apparent contradiction by suggesting that organizations with different objectives may behave similarly under certain market conditions. By tracking key variables of hospital behavior in the United States between 1960 and 1999, this paper argues that the similar behavior of hospitals under different ownership structure found in recent empirical studies may be the result of a continuing convergence process. Theoretical analysis suggests that the introduction of federally funded insurance for certain patient groups may account for the growing convergence in the behavior of these two ownership types. Analysis of hospital-level data for California indicates that the convergence was effected largely through acquisitions of nonprofit hospitals by for-profit institutions and vice versa.

Building on the success of the first edition, this thoroughly revised and expanded edition explores (1) areas of general agreement from previous research; (2) areas of conflicting results and unexplored questions; (3) the relative roles of theory, data availability and empirical analysis in explaining gaps in our knowledge; and (4) what must be done to improve our knowledge and extend the literature. Selected original chapters addressing especially challenging topics include the value of risk management to nonprofit decision-making; nonprofit wages theory and evidence; the valuation of volunteer labor; property tax exemption for nonprofits; when is competition good for the third sector; and product diversification and social enterprise; international perspectives; the application of experimental research and the macroeconomic effects of the nonprofit sector.

This article develops multiobjective models of hospital decision making that incorporate the internal decision process in both a for-profit and a non-profit hospital (NPH). Predicted output and quality for an NPH differ from those for a for-profit hospital under some conditions but converge under others. Convergence may be the result of a complex internal decision structure with decision control primarily by physicians, similar objectives across different organizational forms, or differing constraints. The mechanisms underlying these outcomes provide explanations for conflicting results in empirical studies of non-profit and for-profit hospitals and provide a different rationale for convergence than non-profit response to competition from for-profit hospitals. Understanding the source of convergence is important for policies directed toward the tax treatment of NPHs.