Regulator Leniency and Mispricing in Beneficent Nonprofits

by Jonas Heese, Ranjani Krishnan & Frank Moers

Overview — How organizations influence regulation is a complicated and dynamic process. In a study of boundaries regarding appropriate compliance in the context of the health care industry, the authors offer that nonprofits that provide unprofitable services such as the provision of charity care and medical education (beneficent nonprofits) are less likely to face regulatory enforcement for mispricing and exhibit more mispricing. Results indicate that lenient enforcement assists beneficent nonprofits to obtain higher revenues in price-regulated markets.

Author Abstract

We posit that nonprofits that provide a greater supply of unprofitable services (beneficent nonprofits) face lenient regulatory enforcement for mispricing in price-regulated markets. Consequently, beneficent nonprofits exploit such regulatory leniency and exhibit higher mispricing. Drawing on organizational legitimacy theory, we argue that both regulators and beneficent nonprofits seek to protect their legitimacy with stakeholders, including those who demand access to unprofitable services. Using data from hospitals, we examine mispricing via "upcoding," which involves misclassifying ailment severity. Archival analysis indicates less stringent regulatory enforcement of upcoding for beneficent nonprofit hospitals, defined as hospitals that provide higher charity care and medical education. After observing regulator leniency, beneficent hospitals demonstrate higher upcoding. Our results suggest that lenient enforcement assists beneficent nonprofits to obtain higher revenues in price-regulated markets.