Does Nonprofit Ownership Matter for Firm Performance? Evidence from Ownership Conversions of Nursing Homes

In the past two decades, many healthcare organizations converted their ownership status from nonprofit to for-profit (NP-to-FP) or from for-profit to nonprofit (FP-to-NP). These conversions have drawn public scrutiny and triggered a debate about the implications of ownership conversions on the performance of healthcare organizations. There is no clear answer to this debate as the existing empirical evidence on nonprofit behavior and performance has been inconclusive. Employing a nationwide panel dataset of U.S. nursing homes from 2006 to 2017, we conduct a difference-in-differences analysis on converted nursing homes’ performance in three dimensions: financial performance, quality of care, and access of care. We find that after NP-to-FP conversions, nursing homes’ operating margins and admissions of Medicaid residents increased significantly. The post-conversion quality of care decreased on average, and the decline was mostly concentrated in those nursing homes with high pre-conversion occupancy rates. By contrast, after FP-to-NP conversions, nursing homes’ operating margins and admissions of Medicaid residents decreased, while their quality of care remained unchanged. Validating the empirical implications of existing nonprofit theories, we find evidence supporting the theory of “nonprofit entrepreneurs” distributing profits through perquisites. Although we do not find evidence supporting the theory of nonprofits being “for-profits in disguise”, we do not find nonprofits to be altruistic in serving economically disadvantaged populations. We also do not find evidence supporting the theory that nonprofit status can be used as a quality signal to consumers. Based on these findings, we make two policy recommendations to nursing home regulators: (1) When evaluating NP-to-FP conversions, more scrutiny is needed for those with high pre-conversion occupancy rates, which would likely lead to a decline in quality of care; (2) FP-to-NP conversions need more scrutiny as they are likely to be used as vehicles to obtain undue government subsidies.