Governance Challenges in Nonprofit Hospitals

This study examines the governance of nonprofit hospitals and hospital systems, analyzing both internal mechanisms, such as boards of directors and incentive contracts, and external controls, including government oversight and the market for corporate control, with an emphasis on the latter. Nonprofit boards tend to be large, include employee representatives, and have outside directors with limited industry expertise, while external oversight is generally weak. CEO compensation and turnover are minimally influenced by non-financial performance measures, such as care quality or charitable activities. The market for corporate control also plays a limited disciplinary role: poorly performing nonprofits are about half as likely as for-profits to be acquired or closed, and underperformance in non-financial areas does not affect acquisitions or closures. Analysis using time-series and cross-sectional differences in state oversight shows that stronger oversight accounts for much of the lower takeover rates among nonprofits. Overall, nonprofit hospital governance structures appear to lack many characteristics typically associated with effective governance.

Lewellen, K., Phillips, G. M., & Sertsios, G. (2025, August). Control without ownership: Governance of nonprofit hospitals (NBER Working Paper No. 34132). National Bureau of Economic Research. https://www.nber.org/papers/w34132?utm_campaign=ntwh&utm_medium=email&utm_source=ntwg18