Journal of Productivity Analysis

, Volume 29, Issue 1, pp 61–75 | Cite as

Expense preference behavior and management “outsourcing”: a comparison of adopters and non-adopters of contract management in U.S. hospitals

  • Kathleen Carey
  • Avi Dor


Specialized managerial expertise, coupled with the threat of non-renewal should improve efficiency in firms that opt for contract management arrangements. To examine this we apply a generalized version of tests for expense preference behavior to U.S. hospitals in the 1990s. Extending prior literature, we create a quasi-experimental design for a comparison of adopters and non-adopters of contracts using propensity score methods. We generate the distribution of ‘expense preference’ parameters for all contract adopters in both the pre- and post-adoption states, and for a matched control group of non-adopters over the same period. Our results show that contract adoption leads to reduced expense preference behavior, but that this result depends critically on the input being examined.


Expense preference Hospitals Contract management 

JEL Classifications

D24 L24 


  1. Alexander JA, Rundall TG (1985) Public hospitals under contract management. Med Care 23(3):209–219CrossRefGoogle Scholar
  2. Angrist JD, Krueger A (1999) Empirical strategies in labor economics. In: Handbook of labor economics V3A, Chapter 23. Elsevier, New YorkGoogle Scholar
  3. Awh RY, Primeaux WJ (1985) Managerial discretion and expense preference behavior. Rev Econ Stat LXVII(2):224–231CrossRefGoogle Scholar
  4. Berndt E, Christensen L (1973) The translog function and the substitution of equipment, structures, and labor in U.S. manufacturing 1929–1968. J Economet 1(1):81–113CrossRefGoogle Scholar
  5. Blair DW, Placone DL (1988) Expense-preference behavior, agency costs, and firm organization: the savings and loan industry. J Econ Bus 40(1):1–15CrossRefGoogle Scholar
  6. Brickley J, Van Horn RL (2002) Managerial incentives in nonprofit organizations: evidence from hospitals. J Law Econ 45(1):227–249CrossRefGoogle Scholar
  7. Buerhaus PI, Staiger DO (1999) Trouble in the nurse labor market? Recent trends and future outlook. Health Affairs 18(1):214–222CrossRefGoogle Scholar
  8. Carey K (1997) A panel data design for estimation of hospital cost functions. Rev Econ Stat LXXIX:443–453Google Scholar
  9. Carey K, Dor A (2004) Trends in contract management: the hidden evolution in hospital organization. Health Affairs 23(6):192–199CrossRefGoogle Scholar
  10. Commission on Engineering and Technical Systems (CETS) (2000) Outsourcing management functions for the acquisition of federal facilities. Washington DC: National Academies PressGoogle Scholar
  11. Dehejia RH, Wahba S (1999) Causal effects in non-experimental data: re-evaluating the evaluation of training programs. J Am Stat Assoc 94(448):1053–1062CrossRefGoogle Scholar
  12. Dehejia RH, Wahba S (2002) Propensity score matching methods for nonexperimental causal studies. Rev Econ Stat 84(1):151–161CrossRefGoogle Scholar
  13. Denis D, Denis D, Sarin A (1997) Ownership structure and top management turnover. J Finan Econ 45(2):193–223CrossRefGoogle Scholar
  14. Dewatripont M, Maskin E (1995) Contractual contingencies and renegotiations. RAND J Econ 26(4):704–719CrossRefGoogle Scholar
  15. Dor A (1994a) Are contract-managed hospitals more efficient? Rockville, MD: U.S Department of Health and Human Services, AHCPR Publication No. 94-0004Google Scholar
  16. Dor A (1994b) On stochastic frontiers and non-minimum cost functions for health care providers. J Health Econ 13(3):329–334CrossRefGoogle Scholar
  17. Dor A, Farley DE (1996) Payment source and the cost of hospital care: inferences on quality from a multiproduct cost function. J Health Econ 15(1):1–21CrossRefGoogle Scholar
  18. Dor A, Duffy S, Wong H (1997) Expense preference behavior and contract-management: evidence from U.S. hospitals. Southern Econ J 64(2):542–554CrossRefGoogle Scholar
  19. Edwards FR (1977) Managerial objectives in regulated industries: expense-preference behavior in banking. J Polit Econ 85(1):147–162CrossRefGoogle Scholar
  20. Fama E, Jensen M (1983) Separation of ownership and control. J Law Econ 26(2):301–325CrossRefGoogle Scholar
  21. Fare R, Groskoff S, Lovell CAK (1994) Production frontiers. Cambridge University Press, Cambridge, UKGoogle Scholar
  22. Gallant AR (1987) Nonlinear statistical models. New York: WileyGoogle Scholar
  23. Greene J, Nordhaus-Bike AM (1998) Nurse shortage, where have all the RNs gone? Hosp Health Netw 72:78–80Google Scholar
  24. Hannan TH, Mavinga F (1980) Expense preference and managerial control: the case of the banking firm. Bell J Econ 11(2):671–682CrossRefGoogle Scholar
  25. Hirsch BT, Schumacher EJ (1995) Monopsony and relative wages in the labor market for nurses. J Heath Econ 14:443–476CrossRefGoogle Scholar
  26. Imbens GW (2000) The role of the propensity score in estimating dose-response functions. Biometrika 87(3):706–710CrossRefGoogle Scholar
  27. Kimberly JR, Rosenzweig PM (1988) Hospitals boards and the decision to renew the full service management contract. Hosp Health Serv Adm 33(4):449–465Google Scholar
  28. Kralewski JE et al (1984) Effects of contract management on hospital performance. Health Serv Res 19(4):479–497Google Scholar
  29. Lalonde R (1986) Evaluating the econometric evaluations of training programs. Am Econ Rev 76:604–620Google Scholar
  30. Mester LJ (1989) Testing for expense preference behavior: mutual versus stock savings and loans. RAND J Econ 20(4):483–498CrossRefGoogle Scholar
  31. Mobley L, Magnussen J (2002) The impact of managed care penetration and hospital quality on efficiency in hospital staffing. J Healthcare Finan 28(4):24–42Google Scholar
  32. Molnar A, Morales J, Wyst AV (2001) Profiles of for-profit education management companies: 2000–2001. Center for Education Research, Analysis, and Innovation, University of Wisconsin-Milwaukee, Milwaukee, WIGoogle Scholar
  33. Preyra C, Pink G (2001) Balancing incentives in the compensation contracts of nonprofit hospital CEOs. J Health Econ 20(4):509–525CrossRefGoogle Scholar
  34. Roomkin M, Weisbrod B (1999) Managerial compensation and incentives in for-profit and nonprofit hospitals. J Law Econ Organ 15(3):750–781CrossRefGoogle Scholar
  35. Rosenbaum PR (1987) The role of a second control group in an observational study. Stat Sci 2:292–316CrossRefGoogle Scholar
  36. Rosenbaum PR, Rubin DB (1983) The central role of the propensity score in observational studies for causal effects. Biometrika 70:41–55CrossRefGoogle Scholar
  37. Rosenbaum PR, Rubin DB (1984) Reducing bias in observational studies using the subclassification on the propensity score. J Am Stat Assoc 79:516–524CrossRefGoogle Scholar
  38. Rosenbaum PR, Rubin DB (1985) Constructing a control group using multivariate matched sampling methods that incorporate the propensity score. Am Stat 39:33–38CrossRefGoogle Scholar
  39. Rundall TG, Lambert WK (1984) The private management of public hospitals. Health Serv Res 19(4):519–544Google Scholar
  40. Scott L (1994) Firms see pressure, not profits. Modern Healthcare Press, January 31Google Scholar
  41. Shugarman LR, Farley DO (2003) Shortcomings in medicare bonus payments for physicians in underserved areas. Health Affairs 22(4):73–187CrossRefGoogle Scholar
  42. Skinner J (1994) What do stochastic frontier cost functions tell us about inefficiency? J Health Econ 13(3):323–328CrossRefGoogle Scholar
  43. Staiger D, Spetz J, Phibbs C (1999) Is there monopsony in the labor market? Evidence from a natural experiment. NBER Working paper 7258Google Scholar
  44. Van Vliet R, Van-Praag B (1987) Health status estimation on the basis of mimic-health care models. J Health Econ 6(1):27–42CrossRefGoogle Scholar
  45. Vita M (1990) Exploring hospital production relationships with flexible functional forms. J Health Econ 9:1–21CrossRefGoogle Scholar
  46. Wheeler RC, Zuckerman HS (1984) Hospital management contracts: institutional and community perspectives. Health Serv Res 19(4):499–517Google Scholar

Copyright information

© Springer Science+Business Media, LLC 2007

Authors and Affiliations

  1. 1.Boston University School of Public HealthBostonUSA
  2. 2.VA Center for Health Quality, Outcomes and Economic ResearchBedfordUSA
  3. 3.George Washington UniversityWashington DCUSA
  4. 4.NBERCambridgeUSA

Personalised recommendations