R. Lawrence Van Horn

Managerial Incentives in Nonprofit Organizations: Evidence from Hospitals

This paper examines the incentives of chief executive officers (CEOs) in a large sample of nonprofit hospitals. The evidence indicates that both turnover and compensation of these CEOs are significantly related to financial performance (return on assets). We find no evidence that nonprofit hospitals provide explicit incentives for their CEOs to focus on altruistic activities. The turnover/performance relation appears stronger in nonprofit hospitals than in for‐profit hospitals and other for‐profit corporations (our data do not allow us to compare compensation incentives). Past research suggests that there is little distinction between the outputs and behaviors of private nonprofit and for‐profit hospitals. Consistent with these findings, our study suggests that managers face incentives to concentrate on financial performance in both types of organizations.

Contract Duration: Evidence from Franchising*

Economists generally view standard franchise contracts as efficient, while franchisee advocates view them as exploitive. Consistent with the economic view, we find that contract duration is positively and significantly related to the franchisee’s physical and human capital investments (which are often firm specific). In contrast to assertions by franchisee advocates, we find that these relations exist in subsamples containing only the most established franchisors (as measured by size and experience) and that larger, more experienced franchisors tend to offer longer‐term contracts than do newer franchisors. Our evidence also suggests that there is learning across firms about optimal contract terms.

Incentives in Nonprofit Organizations: Evidence from Hospitals

This paper examines the incentives of CEOs in a large sample of nonprofit hospitals. The evidence suggests that the relations between financial performance (return on assets) and CEO turnover and compensation are as strong in nonprofit hospitals as in for-profit hospitals and other for-profit corporations. We find little evidence that nonprofit hospitals provide explicit incentives for their CEOs to focus on altruistic activities. The results add to the collective evidence that there is little distinction between the behaviors of nonprofit and for-profit hospitals. We provide some evidence that these similarities are due to competition in the marketplace, not identical objective functions.

Contract Duration: Evidence from Franchise Contracts

This study provides evidence on the determinants of contract duration using a large sample of franchise contracts. We find that the term of the contract systematically increases with the franchisees physical and human capital investments, measures of recontracting costs, and the franchisors experience in franchising (which we argue is negatively related to uncertainty about optimal contract provisions). These results are consistent with the hypothesis that the optimal contract duration involves a tradeoff between protecting the parties against potential hold-up of relationship-specific investment and reducing the flexibility that the parties have to respond to environmental changes.

Division of Labor in Medical Office Practices

This paper examines the staffing, division of labor, and resulting profitability of primary care physician practices. Division of labor is viewed as a mechanism to increase the efficiency of production processes through specialization. At the same time, division of labor also introduces coordination cost as handoffs and communication needs increase. We attempt to empirically assess the net effect in primary care physician offices. We collected data from a sample of these practices and tested two hypotheses: (H1) controlling for staff size, greater delegation through the use of more staff types will decrease the throughput of visits, and (H2) controlling for staff size, income per unit time generated by the practice is decreasing in the number of staff types. We find evidence supporting both hypotheses. We conclude that many physicians are gaining little financial benefit from delegating work to support staff. This suggests that small practices with few staff may be viable alternatives to traditional practice designs.

Hospital affiliation and capital structure: how will capital markets guide health care restructuring?

In this paper we discuss the potential role capital markets will play in health care restructuring. According to theory, agency costs, asymmetric information and strategic interactions cause the cost of capital for nonprofit entities to slope upward. Freestanding nonprofits are particularly disadvantaged in this regard. We conclude that some organizational forms will be less viable due to problems of capital access. Empirical work examines the capital structure of nonprofit entities. Our results indicate that chain hospitals are able to access more debt, both taxable and tax-exempt, than freestanding hospitals. Capital markets also associate for profit market presence with capital risk. We conclude that freestanding hospitals are at a relative disadvantage is accessing capital markets.

How Well Do Travel Cost Models Measure Competition Among Hospitals

Health plans create competition among hospitals by threatening to “steer” patients to preferred facilities. Mergers can reduce this competition and economists have begun using travel cost demand models to predict their effects. In this paper, we document an anomaly in estimation: for any plausible estimate of the opportunity cost of time, the price of hospital service is several orders of magnitude larger than the estimated value that patients place on the service. This anomaly raises questions about how well travel cost models measure demand for medical care, competition among hospitals, and the increase in bargaining power created by merger.

Division of Labor and Coordination in Medical Office Practices

This paper examines the staffing, division of labor, and resulting profitability of primary care physician practices. We develop a theoretical model of how practice profit is determined by the number and mix of support staff and how tasks are delegated to support staff. A key element of the model is the way in which it incorporates coordination costs as an increase in labor time needed to process a patient visit when the number of staff and types of staff increase. We estimate model parameters using a survey of local physicians and, through numerical experiments with our theoretical model, find that in this setting, coordination costs can easily dominate productivity benefits from additional staff. The implication is that physicians who attempt to increase practice output by delegating a large fraction of the work to support staff gain little financially while spending less time with each patient. An empirical analysis of our survey data supports this conclusion.

HIGH PERFORMANCE SUCCESSION AND THE RETENTION OF MANAGERIAL TALENT.

This paper examines the under-researched topic of high performance succession (HPS), which is the inability of an organization to retain a talented CEO. The results suggest that HPS is more likely among divisional CEOs in M-form organizations than among CEOs of stand-alone firms.