The Proper Scope of Government in Hospitals

Abstract: Do organizations in governmental and in private, for-profit ownership make different strategic decisions in predictable directions? Hart et al. (1997) constructed a model to answer this question but a conclusive empirical answer is still missing. We analyze a unique data set containing information on quality indicators, inputs, and organizational form of all German hospitals. Our preliminary results confirm the link hypothesized by Hart et al. between lower cost and lower service quality. However, we have to refute the idea that private hospitals focus on cost cutting. Our results suggest the opposite: private hospitals focus on high-quality production. As high quality requires more health personnel, private hospitals also incur higher cost of production than public hospitals.