Can Nonprofits Save Lives under Financial Stress? Evidence from the Hospital Industry

Janet Gao | Tim Liu | Sara Malik | Merih Sevilir

Apr 7, 2025

Key Takeaways

External financing shocks, such as the difficulty of raising debt during the 2008 Global Financial Crisis, hit for-profit hospitals harder, leading to higher patient mortality.
For-profit hospitals exhibit greater sensitivity to financial stress, leading to an increase in patient mortality during periods of financial stress.
Nonprofit hospitals show resilience to financial stress, with no significant increase in patient mortality during financial downturns.
Vulnerable patient groups, such as those with public insurance or high-risk diagnoses, face increased mortality at for-profit hospitals during financial stress, but not at nonprofit hospitals.
The operational decisions that for-profit hospitals make, including wage cuts and reduced investment in medical resources, contribute to the observed increase in mortality.
The findings suggest policies supporting nonprofit hospitals could reduce mortality during financial crises, particularly for vulnerable populations.

Source Publication:

Gao, J., Liu, T., Malik, S., & Sevilir, M. (2024). Can Nonprofits Save Lives Under Financial Stress? Evidence from the Hospital Industry. SSRN Working Paper.

Background and Research Questions

Hospitals in the US operate under different ownership structures, which can influence the quality of care during times of economic stress. This paper explores the impact of external financing shocks—such as the 2008 Global Financial Crisis and subsequent difficulty of raising debt—on patient outcomes at for-profit versus nonprofit hospitals. The central research question asks whether nonprofit hospitals provide better-quality care than for-profit hospitals during periods of financial strain, and if so, what mechanisms drive these differences.

Data and Methodology

The study analyzes data from over 34 million patient records in California hospitals between 2005 and 2014. To assess the impact of financial shocks, the authors use long-term debt coming due at the onset of the 2008 Global Financial Crisis as a quasi-exogenous shock to hospitals’ ability to roll over debt and maintain external financing. The authors utilize a difference-in-differences methodology, comparing hospitals exposed to these financial shocks with those that were not. Robustness checks, including fluctuations in real estate asset values and exogenous changes in S&P ratings, are used to ensure the reliability of the results.

Findings and Discussion

The study’s findings highlight a significant disparity between for-profit and nonprofit hospitals during financial stress. For-profit hospitals show a 0.4-percentage-point increase in mortality rates during times of financial strain, whereas nonprofit hospitals see no such increase. This difference suggests nonprofit hospitals are better equipped to maintain patient care during challenging financial circumstances.

Furthermore, the study reveals the impact of financial stress is particularly harmful to vulnerable patient groups at for-profit hospitals. Publicly insured patients and those with high-risk diagnoses are more likely to experience adverse outcomes when treated in for-profit hospitals facing financial difficulties. For example, publicly insured patients experience a 0.3-percentage-point increase in mortality rates at for-profit hospitals under financial stress, but no such increase occurs at nonprofit hospitals.

The study also identifies potential mechanisms driving these differences. For-profit hospitals, more focused on profitability, tend to reduce wages and medical investments during periods of financial stress, which may directly affect the quality of care provided. By contrast, nonprofit hospitals are less likely to make these cuts, which may help explain their greater resilience during financial crises. Moreover, the resilience to external financing shocks is concentrated among cash-rich hospitals, suggesting an important role of cash reserves in shielding patients from financial shocks. The role of cash helps explain the different resilience between nonprofit and for-profit hospitals, as nonprofit hospitals hold more cash reserves than for-profit hospitals, likely because nonprofit hospitals are prohibited from distributing earnings.

Beyond wages, bias affects firm size. Mixed firms expand their workforce as they attract more blue workers, while red firms shrink due to limited hiring pools. This uneven distribution of labor weakens the bargaining power of both groups, reinforcing a cycle where firms, rather than workers, dictate employment conditions.

Policy or Market Implications

The findings of this study have important implications for healthcare policy and the management of hospitals during economic downturns. The evidence suggests nonprofit hospitals are more capable of safeguarding patient health during financial stress, either because of their greater focus on patient care rather than profitability or because they hold higher cash reserves for regulatory reasons. Policymakers may consider providing additional financial support to nonprofit hospitals to help them weather economic storms and continue providing quality care to vulnerable populations. Moreover, the study’s findings could inform corporate governance decisions in the healthcare industry, particularly for for-profit institutions, which may need to reconsider their operational strategies to prioritize patient care during financial crises.