The United States hospital industry is an unusual market in that nonprofit and for-profit producers exist simultaneously. Theoretical literature offers conflicting views on whether nonprofit hospitals are less financially efficient. Theory suggests that nonprofit hospitals are so much more interested in offering high-quality service than in making money that they frequently input more resources to provide the same output of service as for-profit hospitals. This priority might also often lead them to be less vigilant in streamlining their services—eliminating duplication between departments, for instance. Conversely, while profit motive is thought to encourage for-profit hospitals to attain efficient production, most theorists admit that obstacles to that efficiency remain. For-profit hospital managers, for example, generally work independently of hospital owners and thus may not always make maximum financial efficiency their highest priority. The literature also suggests that widespread adoption of third-party payment systems may eventually eliminate any such potential differences between the two kinds of hospitals.

The same literature offers similarly conflicting views of the efficiency of nonprofit hospitals from a social welfare perspective. Newhouse (1970) contends that nonprofit hospital managers unnecessarily expand the quality and quantity of hospital care beyond the actual needs of the community, while Weisbrod (1975) argues that nonprofit firms—hospitals included—contribute efficiently to community welfare by providing public services that might be inadequately provided by government alone.


The author mentions duplication between departments primarily in order to


illustrate an area in which nonprofit hospitals fail to provide adequate services

describe the outcome of nonprofit hospitals' emphasis on maintaining managerial freedom

recommend a particular change that would allow nonprofit hospitals to streamline their services

suggest a way in which nonprofit hospitals may fail to achieve maximum financial efficiency

explain why nonprofit hospitals may be able to provide more services than for-profit hospitals

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Prep2008E2-RC