On the economics of nonprofit sellers: Output policies in community hospitals

In applications of the theory of the nonprofit firm it is commonly assumed that output and sales are equal. This paper proposes that the nonprofit firm may plan to produce, and actually produce, an output larger than it sells. We call such a strategy an "excess output" production policy. The policy can lead to chronic excess capacity, and it always implies that seller average revenue exceeds unit costs evaluated at the level of sales. Using the nonprofit community hospital as an example, the paper examines the characteristics of excess output policies and the possibilities for controlling their performance impacts. Data on a sample of U.S. community hospitals are used to test for the existence of excess output policies in the hospitals are used to test for the existence of excess output policies in the hospital sector. The results give qualified support for the conclusion that some hospitals follow excess output production policies.