Paying a return on equity to not-for-profit hospitals--some further thoughts.

There has been a controversy over whether not-for-profit hospitals should receive a return on equity, and whether that return should equal the return paid to for-profit hospitals. The recent discussion of this question in this journal has helped to clarify the issues somewhat. In this note I will offer a interpretation of the critiques by Conrad [1] and Silvers and Kauer [2] ofmy earlier contribution [3], which will, I hope, advance matters yet further. I will present a way of reconciling the theories that the participants in the discussion have in mind. The dispute, I will argue, is not over the theory, but over the empirical facts. While I will then offer some of my own conjecture on these facts, my major purpose here is to indicate the importance of the empirical verification which has not yet occurred. The general question is whether third-party payers should include a return on equity in the price they pay not-for-profit firms for hospital care. I argued that, whether one's objective is to maximize social efficiency or to minimize the cost to a payer for a given amount of care, the return on equity that ought to be included in the price paid to a notfor-profit hospital could well be less than the normal profit or economywide opportunity cost of capital one might pay to for-profit firms, and could even be zero. In comments on my article, both Conrad [4] and Silvers and Kauer [2] reiterated their earlier views that the return included in the price should always be the same for all types of hospitals, and should always equal the opportunity cost of the capital. There is general agreement among all of us that the key to understanding price determination is the reward that must be paid to philan-