Introduction
The rapidly growing and evolving nonprofit sector is prominent in major service industries such as hospitals, nursing homes, higher education, and museums—often competing with for-profit and governmental organizations, but also often collaborating with them. These interactions among institutional forms in mixed industries are a key research focus of this program and its chair, economist Burton Weisbrod. Faculty in this area examine:
 Overview
of Activities
Nonprofit Performance Measurement
Fundamental to problem solving for any firm, be it nonprofit, public, or for-profit, is how to empirically measure “performance” or “outcomes” to enhance performance. Yet it is difficult, if not impossible, to gauge nonprofit and public services, such as hospitals, museums, schools, or the post office, by a private profitability metric. Such a gauge does not adequately reflect their true societal contributions and thus misses key aspects of their performance.
Against this backdrop, economist Burton Weisbrod, John Evans Professor of Economics, launched an interdisciplinary group to look at performance measurement in the public and nonprofit sectors. The group examines issues such as hospital, physician, and public school report cards and measuring and rewarding performance of junior colleges and high school principals. More than 15 faculty are participating from Northwestern’s School of Education and Social Policy, Kellogg School of Management, Law School, and departments of economics, political science, sociology, and statistics. A special Searle Fund, managed by the law school is considering supporting it. This grant will facilitate bringing in outside speakers to talk about performance measurement, planning for a national conference, and support innovative research and dissemination in this area.
The Business of the Higher Education Industry
As part of a study of the higher education industry, a mixture of public, nonprofit and for-profit institutions, Weisbrod is completing a book manuscript, tentatively titled “Money, Mission, and the Business of Higher Education.” Co-authored with Jeffrey Ballou of Northeastern University and IPR project coordinator Evelyn Asch, the manuscript examines such issues as how to estimate donations for individual schools, the true, as compared with the reported, profitability of athletics, colleges’ legislative lobbying, and the changing characteristics of college presidents, as indicators of differential organization goals—all within the context of an industry with a mixture of public, nonprofit, and for-profit providers.
The authors also examine entries, exits, and mergers of schools, conversions from one ownership form to another, collegiate credit ratings, university “technology transfer” activities, and responses to competition and advertising. Higher education organizations are viewed within the framework of a two-good model in which an unprofitable “mission” good is financed by the sale of a profitable “revenue” good. An implication of this model is that nonprofit and public universities will act as profit maximizers, like private firms, in the revenue-good markets, but systematically differently in mission-good markets. This project is supported by the Spencer Foundation.
Healthcare Industry
The vast majority of Americans purchase health insurance through the private sector. Moreover, in recent years the public sector has increasingly turned to private insurers to deliver some or all of their commitments to enrollees. In spite of the enormous sums of public and private funds entrusted to these insurance carriers, there is little systematic research about them. Using a privately gathered national database of insurance contracts from a sample of large, multisite employers, economist Leemore Dafny investigates whether these markets are competitive by examining insurance carriers’ pricing. She finds insurers are successfully charging higher premiums to more profitable firms, and such markups are frequent in markets with little competition. This suggests that, at least in some markets, imperfect competition among carriers is leading to higher health insurance premiums.
In other recent work, Dafny explores whether hospital managers face pressure to maximize reimbursement by exploiting loopholes in government insurance programs. A 1988 change in Medicare rules widened a pre-existing loophole in the Medicare payment system. This gave hospitals an opportunity to increase operating margins by more than 5 percent simply by “upcoding” patients to codes for more expensive procedures. Dafny and her colleague, David Dranove, find that “room to upcode” is a significant predictor of whether a nonprofit hospital replaces its management with a new team of for-profit managers. They also find that hospitals replacing their managers subsequently upcode more than a sample of similar hospitals that did not.
Weisbrod is researching behavioral differences among for-profit, public, religious nonprofit, and secular non-profit hospitals, examining differences in public-goods provision—charity care, research, and education—over 21 years for all California hospitals.
Weisbrod has also been investigating market change for brand-name and generic drugs between 1970 and 2004. In looking at the 50 most-dispensed drugs each year and when new drugs first appear on the list, he finds a substantial increase in the number of new brand-name drugs on the most-dispensed lists. Between 1970 and 1981, 6 to 8 percent of all brand-name drugs on the most-dispensed list were new each year. In the past decade, however, it has increased to more than 10 percent. At the same time, the quantitative importance of generic drugs, and of new generics, grew especially sharply, particularly since 1985. These reveal a picture of quantitative change over time, an especially important consideration given how much brand-name pharmaceuticals are increasing as a slice of total healthcare expenditures, despite the growth of low-cost generic drugs. These measures do not capture the medical importance of a new drug, except by usage, but they do reflect a way to measure available and widely used drugs.
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