Differences in Profit and Nonprofit Organizations: A Study of Effectiveness and Efficiency in General Short-Stay Hospitals

Differences in Profit and Nonprofit Organizations: A Study of Effectiveness and Efficiency in General Short-Stay Hospitals

Author(s): William Rushing

Source: Administrative Science Quarterly , Dec., 1974, Vol. 19, No. 4 (Dec., 1974), pp. 474-484

Published by: Sage Publications, Inc. on behalf of the Johnson Graduate School of Management, Cornell University

Stable URL: https://www.jstor.org/stable/2391804

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact [email protected]. Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at https://about.jstor.org/terms

Sage Publications, Inc. and Johnson Graduate School of Management, Cornell University are collaborating with JSTOR to digitize, preserve and extend access to Administrative Science Quarterly

This content downloaded from �����������71.232.63.204 on Mon, 02 Oct 2023 06:58:01 +00:00������������

All use subject to https://about.jstor.org/terms

Differences in Profit and Nonprofit Organizations: A Study of Effectiveness and Efficiency in General Short-Stay Hospitals

William Rushing

1

Research for this paper was supported by Grant Number HS-00028 from the National Center for Health Services Research and Development. Support of the Tennessee Mid-South Regional Medical Program also facilitated the research, Comments by Anthony Obserschall on an earlier version of this paper are appreciated. as is the computer assistance of Thomas James.

Results of a study of small short-stay profit and nonprofit hospitals show significant differences in organizational rela- tionships. The proportionate number of management and support personnel is negatively associated with the occupancy rate and the proportionate number of production personnel is more positively associated with occupancy rate in profit hospitals but not in nonprofit hospitals. Average daily charges are associated with community wealth for profit hospitals, but not for nonprofit hospitals. It is suggested that the profit- making orientation of hospitals is a significant contextual property which influences the relationships of hospital struc- ture and community wealth to hospital efficiency and effectiveness.'

Despite the apparent fundamental distinction between profit and nonprofit organizations, their differences in organizational efficiency and effectiveness have received little systematic conceptual analysis by organizational theorists and few if any organizational studies have been conducted comparing these characteristics.

The concepts of organizational efficiency and effectiveness date to Barnard's (1 938) analysis. For Barnard, effectiveness was defined in terms of organizational goal attainment and efficiency in terms of satisfaction and cooperation of organi- zational participants. Thompson (1 967: 4-6), however, noted that in scientific management, administrative science, and bureaucratic theory, it is efficiency that is viewed in terms of goal attainment. Etzioni (1 964: 8) spoke of effectiveness in terms of goal attainment, with efficiency being defined in economic terms-the "amount of resources used to produce a unit of output." Thompson's (1 967: 86) perspective was similar; efficiency is assessed in terms of economic criteria and, although Thompson (1 967: 14) did not use the term effectiveness, he did speak of instrumental orientations and criteria, which refer to the extent to which the organizations are able to achieve their goals.

Efficiency will be defined in this study in the same way that Etzioni and Thompson used it, but the approach to effective- ness will be in terms of Yuchtman and Seashore's (1 967) system resource perspective. The general hypothesis pre- sented in this article is that the organizational correlates of efficiency and effectiveness differ depending on whether the organization is a profit or nonprofit organization. Type of organization is viewed as a contextual property for the relationships between organizational characteristics and criteria of efficiency and effectiveness.

THE STUDY AND DATA

Data are from a sample of profit and nonprofit hospitals. The bulk of the data is based on responses to a questionnaire sent to hospital administrators in the 1 05 general short-stay hospitals in the Tennessee Mid-South region that were members of the American Hospital Association in 1 968. The questionnaire was mailed in the spring of 1 969 and included 1 40 occupational titles commonly found in general hospitals. Respondents were asked to indicate the full-time equivalent personnel employed in their hospitals for each category and to add any occupational category present in their hospital, but not listed on the questionnaire; 14 titles were added by all the hospitals responding. Following additional requests, a total of 91 hospitals responded, for an 87 percent response rate.

474/ASQ

This content downloaded from �����������71.232.63.204 on Mon, 02 Oct 2023 06:58:01 +00:00������������

All use subject to https://about.jstor.org/terms

2 For brevity, the AHA Guide to the Health Care Field will henceforth be referred to as the Hospitals Guide Issue in this article.

Profit and Nonprofit Organizations

In consultation with experienced hospital administrators and registered nurses, the author and an associate grouped occu- pations into three categories: administrative, production, and hotel. Administrative includes two subcategories-managerial and clerical. The former includes all department heads, super- visors, administrators, and assistant administrators, while the latter includes all persons engaged in information processing activities, such as secretaries, clerks, accountants, bookkeepers, and data processing operators. The production component includes all persons who perform a direct or indirect patient service or whose training qualifies them to perform such a service. Specific occupations include registered nurses, excluding nurses in supervisory positions-directors, super- visors, and head or charge nurses; practical nurses; nurse aides; orderlies; salaried physicians, for example, pathologists; and all types of technicians and therapists. Hotel personnel are concerned with the physical maintenance and cleanliness of the physical plant, as well as the room and board needs of staff and patients, and include such activities as dietary or kitchen, for example, cooks or tray girls; housekeeping, such as janitors or maids; laundry-laundry workers; and building and grounds, for example, painters and yardmen.

Some error is usually involved when occupations are classified according to the organizational functions performed. In the present instance, the performance of administrative functions by registered nurses is especially noteworthy and has been recognized as a source of strain in this role (Christman and Jellinek, 1 967; Lysault, 1 970). There is little doubt that the role of a nonsupervisory registered nurse contains a higher proportion of production activity than the role of assistant administrator, clerk, cook, janitor, or painter. In some instances, however, there are clearly ambiguous cases. For example, dietician could be classified as hotel as well as production, but was finally classified as hotel. In most instances, agree- ment on the classification of the title as primarily administra- tive, production, or hotel posed little difficulty. Moreover, since all ambiguous cases involved very few personnel, errors stemming from the classification of such titles would have no practical significance.

In addition to occupational data, information concerning several characteristics of each hospital and the county in which each hospital is located was obtained from the 1 970 AHA Guide to the Health Care Field2 and the United States census.

Profit and Nonprofit Hospitals

Of the 91 hospitals responding to the questionnaire, 22 were profit making. All but 1 had 95 beds or less-the exception having 1 99. Only 40 of the 69 nonprofit hospitals were in this size range. In order to avoid comparing predominantly small profit hospitals with a substantial number of large nonprofit hospitals, analysis was limited to hospitals with 95 beds or less. Moreover, data for computing measures of efficiency and effectiveness were available only for 37 non- profit and 1 6-efficiency-and 1 4-effectiveness-profit makers. Although conclusions must be qualified with respect to the size range of hospitals, limitation of the study to hospitals of a common size has an advantage, since the effects of size are minimized. Nevertheless, even within this restricted size range, profit hospitals are smaller than nonprofit hospitals. The average number of personnel is 65.67 and 103.50, respectively.

The designation of hospitals as profit making or nonprofit

making was based on information provided in the 1 970

475/ASQ

This content downloaded from �����������71.232.63.204 on Mon, 02 Oct 2023 06:58:01 +00:00������������

All use subject to https://about.jstor.org/terms

3 Davis' (1972: 11 ) analysis of different facilities in profit and nonprofit hospitals indicates that for hospitals with over 100 beds, differences in types of service offered have decreased over time. Along with radioisotope, the presence of a premature nursery is the facility that shows the greatest difference between the two types of hospitals, but there has been a decline in premature nurseries in both types of hospitals.

4 The difference may not be limited to hospitals, but may characterize differences between profit-making and nonprofit- making organizations in general. For example, according to Congressional testimony, the profit retained by TVA for investment in its physical plant, expansion of service, and improvements since 1 967 has run almost twice that for private utilities (Nashville Tennessean, May 8, 1 973: 1 7).

Hospitals Guide Issue. Fourteen of the profit makers have corporate structures, none of which at the time of the study were part of chain corporations, while 4 are individually owned and 3 are partnerships. Twenty-six nonprofit hospitals are government owned and 14 others are in the other non- profit category. No significant differences were found between these distinctions on the variables included in this study.

Several differences between profit and nonprofit hospitals have been observed in other studies. Berry (1 967) reported that the former tend to be smaller and to offer, on the average, a smaller range of services. Davis (1 972) observed that from 1 961 to 1 969 profit hospitals increased their admissions and capacity at a higher rate and had fewer assets and personnel per patient than nonprofit hospitals. Davis notes little differ- ence in the occupancy rate, however. Other comparisons indicate that hospital charges to patients may be lower for profit makers in certain areas of the country (Owen, 1970).

A particularly controversial issue concerns differences in the services offered by the two hospitals. Critics of profit-making hospitals charge that they tend to dump the expensive services on which it is difficult to make a profit-such as emergency rooms and obstetrics. They have also been accused of cream skimming-admitting only those patients who will be in the hospital for a limited stay, for example, those with appendectomies, and who therefore will have a high per day charge, since the most expensive services tend to be provided shortly after admission. It is not possible to address these general issues with-the current data, since, as suggested by the results of others (Berry, 1 967), to a substantial degree the type of service rendered is a function of hospital size. Since the hospitals in this study were of a common size range, the problem of differences in services is minimized. A comparison of the two types in the average number of services provided from among 34 of 35 services reported in the Hospi- tals Guide Issue-hospital auxiliary service is excluded- shows an average of 4.69 services for profit makers versus 5.1 5 for nonprofit makers. Comparisons for each of the 34 services yielded only one statistically significant relationship, based on Chi-square; premature nurseries are more apt to be present in nonprofit than in profit hospitals. In this analysis, therefore, it will be necessary to consider the possible influence of this differences

Davis (1 972) has noted that the distinction between profit and nonprofit hospitals may be a misnomer, since both types make a profit. All hospitals tend to bring in more revenue than they spend, with the excess in nonprofit hospitals usually being invested in the expansion of hospital services and operations. This may constitute a significant difference never- theless: nonprofit hospitals may be more disposed to invest their profit in expanded services and operations than profit makers.4

Probably one of the most significant differences between the two types of hospitals is in terms of ultimate control. This, in turn, has an important implication for the decision-making process. Decision making in all organizations is complicated and its relationships to structural properties of organizations are not well understood. Studies of hospitals suggest that decision making in hospitals often is accompanied by conflict between administrators, physicians, and boards of trust (Burling, Lentz, and Wilson, 1 956; Lentz, 1 957; Smith, 1 958; and Perrow, 1965). It is plausible to assume, however, that there is less conflict between these groups in profit than in

476/ASQ

This content downloaded from �����������71.232.63.204 on Mon, 02 Oct 2023 06:58:01 +00:00������������

All use subject to https://about.jstor.org/terms

Profit and Nonprofit Organizations

nonprofit hospitals, if for no other reason than that ownership and control are more likely to be lodged in the hands of one group, physicians. Physicians and administrators have no community board of trust to which to answer and physicians may control the administration in profit-making more than in nonprofit-making hospitals. Forty-five percent of the profit makers have physicians as the head administrator in com- parison to only 10 percent of the nonprofit institutions.

This is not to say that conflict between community need, administrative functions, and physicians' concern for medical service and their own professional autonomy do not exist. Even when such functions are lodged in one group, such as when physicians own and control the hospital, individuals in that group may experience considerable role conflict between contending organizational functions. The assumption here is only that such conflict in the decision-making process is less likely in profit-making hospitals, because competing criteria for making decisions are more apt to be systematically subordinated to only one criterion, the economic interest of the hospital.

Because of this, criteria used in making decisions may be clearer in profit-making hospitals. In nonprofit hospitals, decisions are more apt to be based on a variety of criteria: perception of community need; the wishes and desires of members of the board of trust, which may or may not be consistent with community needs or the economic interest of the hospital; empire building tendencies of the hospital administrator; and the outcome of the give and take between administrators, board of trust and physicians. Although deci- sions may be made predominantly on the basis of the phy- sician's profit, as one economic analysis suggests (Pauly and Redisch, 1 973), this does not mean that decisions are made in terms of institutional economic interests.

Thus, there is reason to believe that profit and nonprofit hospitals differ in at least two important respects. First, economic criteria per se are more important in decision making in profit hospitals. Second, more criteria are apt to influence decision making in nonprofit hospitals. It is anticipated that these differences will make a difference in the way the hospital operates as a system.

EFFICIENCY

Efficiency is used here to refer to "whether a given effect [is] produced with least cost or, alternately, whether a given amount of resources [is] used in a way to achieve the greatest result" (Thompson, 1 967: 86). Assessment of efficiency, therefore, requires measurements of both resources and system outcomes or results.

From a purely economic point of view-which is the perspec- tive used for efficiency-hospitals may be assessed in terms of their occupancy rate. All other things being equal, a hospital is more efficient to the extent that it utilizes its facilities more, which may be indexed by the occupancy rate. A given amount of resources produces a greater result when the hospital occupancy rate is high than when it is low.

There have been a number of studies of occupancy rates in hospitals, most concerned with the relationship between hospital size and occupancy. Evidence indicates that occu- pancy increases at a decreasing rate across the range of size (Davis, 1969; Hefty, 1969). The results of the current study are consistent with this, in that the correlation for all 91

477/ASQThis content downloaded from �����������71.232.63.204 on Mon, 02 Oct 2023 06:58:01 +00:00������������

All use subject to https://about.jstor.org/terms

5 Results for the occupancy rate for only one year (1 969) give essentially the same results as those based on a five-year average.

6 The product-moment correlations between total number of beds and total employees are .91 and .78 for profit and nonprofit hospitals respectively.

7 'The proprietary hospital, by definition, regards itself as an economic enterprise, It must do so in order to survive" (Bonnet, 1967: 66-67).

hospitals is positive, with the occupancy rate increasing at a decreasing rate as total hospital size (total employees) in creases. With a logarithmic transformation of size-base 10, the product-moment correlation increases from .22 to .34. Other studies have concentrated on the relationship between types of administration and occupancy rates and on the rela- tionship between occupancy rates and quality of care (Neuhauser, 1971 ).

The present measure of occupancy differs from that used in other studies, since it is based on a five-year average, 1 965 to 1 969, rather than on one year. This was done because inspection of reported occupancy rates in several Hospitals Guide Issues over a period of years revealed that rates of occupancy sometimes fluctuated widely from year to year. Consequently, the rate reported for any particular year might not be representative of the general occupancy rate for a particular hospital. Averaging over a period of years reduces this problem.5

Measures of hospital resources are for personnel resources. They are the proportion of personnel in each of the three occupational categories to the total number of hospital em- ployees. The higher the proportion for each of the categories, the greater the personnel resources in that category.

Since occupancy rate is a function of the ratio of patients to hospital beds, the denominator for occupancy is highly correlated with the denominator for measures of personnel resources (total personnel).6 Ratio terms which have the same denominator are standardized with respect to the denominator, and in this sense the denominator is statistically controlled in the correlation between the ratios. As several writers have noted, however, correlations between variables having a common denominator may be inflated simply because the variables have common terms; zero-order correlations between ratios with a common denominator are not necessarily identical to partial correlations between the numerators in which the denominator is controlled. (See Kuh and Meyer, 1 955; Fuguitt and Lieberson, 1 973; Schuessler, 1 973; and Freeman and Kronenfeld, 1 973.) A central issue in most discussions is the conceptual status of the ratios and whether the ratios themselves rather than the component parts of the ratios (the numerators and denominator separately) are of primary interest. In our case, it is the number of patients in relation to the number of hospital beds and the number of different types of personnel as a proportion of all personnel, rather than the total number of patients and personnel, that is of theoretical interest. The absolute number of patients will increase with the total number of personnel, as well as with the totals for different categories of personnel, but there is no theoretical interest in that. However, some recommend that even when theoretical interest is in the ratios, relations between the component parts may be profitably explored (Fuguitt and Lieberson, 1 973: 141). For this reason, analysis for the ratio terms will be supplemented with partial correla- tions in which total employees is the control variable.

Our hypothesis is that relationships between measures of personnel ratios and occupancy rates will vary between profit and nonprofit hospitals. Profit hospitals are in business to make a profit first and to provide a service second.7 The reverse is the case for nonprofit hospitals. This is not to say that the former are unconcerned with community service or that the latter are not concerned with a profit. The fact is, however, that profit hospitals are primarily economic organi-

478/ASQ

This content downloaded from �����������71.232.63.204 on Mon, 02 Oct 2023 06:58:01 +00:00������������

All use subject to https://about.jstor.org/terms

8 Hospital administrators and physicians from the region have volunteered com- ments that hiring policies of community- owned hospitals are not based as much as they should be on the qualifications of the individuals being hired or on the needs of the hospital. The employee's relationship with members of the board of trust is viewed as a factor that is sometimes involved in personnel practice.

9 It is assumed that occupancy rate is the dependent variable. As the discussion indicates, however, this is problematic in the sense that resources may be added in anticipation that they will influence the occupancy rate. In this case, one may view resources as the dependent variable, which, in profit hospitals, vary depending on their subsequent estimated effect on the occupancy rate. The relationship is probably one of reciprocal effects over time. Given the limitations of the current data to one point in time, the investigation of such reciprocal effects is not possible,

Profit and Nonprofit Organizations

zations and nonprofit hospitals are not. Consequently, one would expect economic criteria-that is, a concern for efficiency-to be more salient in decision making in profit hospitals. Specifically, the employment and utilization of personnel is more apt to be made in light of anticipated effects on economic outcomes, for example, bed occupancy. In nonprofit hospitals, other criteria are more apt to influence these decisions.8

There are two aspects to this hypothesis. First, it stipulates that more factors besides the anticipated effect on the occu- pancy rate impinge on decision making in nonprofit hospitals; consequently, as is the case when a number of imperfectly correlated variables besides the one under consideration exert effects on a dependent variable, a lower correlation coefficient would be expected than when only one variable exerts an effect. Hence, the profit-making orientation of a hospital is viewed as a significant contextual variable which operates as a causal factor in the number of variables that influence decision making. A higher measure of association for profit hospitals would constitute support for that causal hypothesis.

Second, regardless of the presence of other factors, the influence of efficiency considerations is viewed as stronger in profit hospitals, since these hospitals are primarily economic organizations and secondarily community service organiza- tions. In this instance, the profit-making orientation of hospitals is considered a significant contextual variable which influences the actual effect of personnel resources on eco- nomic outcomes. Therefore, the regression coefficient for the occupancy rate on the level of resources should be higher for profit hospitals.9

It is in terms of production personnel that the hypothesis is most relevant, since these are the personnel who actually perform services that are unique to hospitals and which patients come to the hospital to receive. In addition, in hospitals whose goals are primarily economic, as high a positive correlation between the occupancy rate and the proportionate number of support personnel, that is, adminis- trative and hotel personnel would not be expected, since these personnel make no direct contribution to patient care and, hence, no visible contribution to economic outcomes. Accordingly, differences between profit makers and nonprofit makers would be expected in the relationship between occupancy rate and the three personnel ratios.

Table 1

Comparison of Characteristics of Profit and Nonprofit Hospitals-Average Scores

Profit Nonprofit hospitals- hospitalst

Production personnel .58 .57

Administrative personnel .25 .23

Hotel personnel .20 .22

Ratio of production personnel to administrative and hotel personnel .19 .17

Occupancy rate 74.40 80.02

N=21, except for occupancy rate, in which case N=16.

t N=40, except for occupancy rate, in which case N=37.

479/ASQ

This content downloaded from �����������71.232.63.204 on Mon, 02 Oct 2023 06:58:01 +00:00������������

All use subject to https://about.jstor.org/terms

Results

Before presenting the results, average values for the different variables will be presented separately for the two groups of hospitals. As Table 1 shows, all values are virtually identical, except for the occupancy rate, which is slightly higher for the nonprofit hospitals.

On the average, nonprofit makers are larger. Examination of correlations between size and the independent and dependent variables, however, shows that correlations for the two types of hospitals are almost identical (see Table 2). On this basis, size would be expected to have little or no influence on the relationships under investigation.

Table 2

Product-Moment Correlations between Hospital Size-Total Number of Employees-and 4 Hospital Characteristics of Profit and Nonprofit Hospitals

Profit Nonprofit hospitals hospitalst

Production personnel -.06 .07

Administrative personnel -.20 -.22

Hotel personnel -.1 4 .04

Ratio of production personnel to administrative and hotel personnel .21 .03

Occupancy rate .32 .24

N= 21 except for correlation for occupancy rate, in which case N= 1 6.

t N=40, except for correlation for occupancy rate, in which case N=37.

Product-moment correlation (r) and Spearmen rank-correlatiyn (rs) coefficients are presented in Table 3. Correlations are presented for the three personnel ratios. In profit hospitals, the r is positive for production personnel, but negative for the administrative and hotel personnel; for nonprofit hospitals, the relationship is negative for production personnel and positive for one of the two nonproduction components. All coefficients for nonprofit hospitals are quite small and none is statistically significant. In all three comparisons, the coefficient is considerably higher for profit makers, although only one is significant at beyond the .05 level-for sample size of 1 6, a product-moment correlation must be at least .48 to reach statistical significance at the .05 level with a two-tailed test. Another approximates this level, being significant at the .1 0 level (r=.46).

Results are not due to hospital differences in total number of personnel, since analysis for the absolute number of employees in each of the three personnel categories controlling for total employees yields the same general results. A difficulty in conducting this

Collepals.com Plagiarism Free Papers

Are you looking for custom essay writing service or even dissertation writing services? Just request for our write my paper service, and we'll match you with the best essay writer in your subject! With an exceptional team of professional academic experts in a wide range of subjects, we can guarantee you an unrivaled quality of custom-written papers.

Get ZERO PLAGIARISM, HUMAN WRITTEN ESSAYS

Why Hire Collepals.com writers to do your paper?

Quality- We are experienced and have access to ample research materials.

We write plagiarism Free Content

Confidential- We never share or sell your personal information to third parties.

Support-Chat with us today! We are always waiting to answer all your questions.