The first essay develops a theoretical model to examine the pricing and output behavior of the not-for-profit hospital as it responds to changing prospective reimbursement rates. A utility-maximization framework is employed to derive and evaluate comparative static derivatives describing the effects of a reduction in government reimbursement rates on the prices charged to private payers and on the quantity of uncompensated care. The model predicts that a hospital whose objective function includes profits as well as the provision of charity care services, adjusts to financial pressure by cost-shifting, i.e, charging higher prices to private payers, and by reducing the quantity of uncompensated care. The model further predicts that as demand becomes more price elastic and competitive pressures increase, the ability of the hospital to cost-shift diminishes relative to the ability to reduce its charity care services. This implies that the survival of hospitals in a competitive environment may occur at the cost of squeezing the poor or increasing the number of charity care patients untreated by private hospitals.

The second essay analyzes the cost structure of the nursing home industry in Hawaii, using a multiproduct cost function. Regression models are estimated with two output classifications: one, by source of payment (Medicare, Medicaid and private patient days) and the other, by level of care (SNF and ICF patient days). Estimates show evidence of economies of scale in the provision of Medicare and private patient days, a result likewise reflected in the estimates of increasing returns to scale for SNF patient days. In the case of Medicaid days, slight economies appear to set in only at extremely large levels of output. The study also shows evidence of economies of scope in the production of nursing care services. These findings suggest that potential cost savings may be achieved if services are produced by fewer, larger facilities rather than by many small homes, and if services are provided jointly in one facility rather than separately in many facilities. However, existing CON regulations and facility-specific prospective reimbursement rates do not provide incentives for nursing homes to take advantage of such economies of scale and scope. The bed supply crisis may not be solved in the short run, but it seems that a rational long-run policy might be to encourage the expansion of existing small facilities rather than the building of many new small homes and to facilitate the joint SNF/ICF production of services.