CInSt Research Seminar "Non-Profits vs. For-Profits in Social Service Delivery: A Theory and Application to US Nursing Homes": Leonid Polishchuk (HSE University)
Leonid Polishchuk (HSE University) presented a paper "Non-Profits vs. For-Profits in Social Service Delivery: A Theory and Application to US Nursing Homes" on the regular CInSt research seminar on April, 21. Welcome to watch the video of the seminar following the link bellow
Social service delivery it commonly outsourced to private providers, nonprofit and for-profit. Appeal of for-profit providers is in their high-powered incentives for efficiency and innovations, and in the access to venture capital. However, outsourcing to for-profits carries the well-known risk of lower quality of services in pursuit of cost reduction. Such risks are particularly high, when quality cannot be externally verified and make contractible. Here non-profit providers obtain a competitive edge, since such organizations are less prone to aggressive cost-cutting, and because the sense of purpose and mission makes non-profits directly concerned about service quality.
We offer a stylized theory that weighs pros and cons of for-profits vs. non-profits in social service delivery and incorporates extrinsic (market and contract-based) and intrinsic (mission-based) incentives for quality and cost-efficiency. The main conclusion of the theory is that when market does not provide a substantial quality premium, outsourcing to for-profits should be avoided, in favor of non-profits. However, when market reward is sufficiently sensitive to quality, outsourcing to for-profits becomes a socially acceptable and perhaps even superior option.
We take our theory to the case of long-term care facilities (nursing homes), which are operated by for-profit and non-profit providers. Quality of long-term care is difficult to validate and measure, and in accordance with the above theory, this causes a quality gap between non-profit and for-profit providers. Such gap became evident during the COVID-19 pandemic, when privately operated nursing homes turned into pandemic hotspots with extremely high mortality rates. Weekly data on 15,000 US nursing homes collected by the US Government Center for Disease Control and Prevention, while clearly revealing the quality gap early on in the pandemic, also show that this gap was narrowing and eventually disappeared by the end of 2020. This effect also agrees with our theory, since the coronavirus made quality deficiency in for-profit institutions publicly observable. This strengthened market incentives for quality, which triggered a robust response of for-profit providers, prompting them to catch up with non-profits.