ABSTRACT
This chapter examines the nonprofit firm in the health care sector and provides a description of the nonprofit firm, noting the importance of the nondistribution constraint. What is the nonprofit firm? People commonly assume that nonprofits are firms organized to provide charitable goods or community services and that they obtain their revenues largely from donations. In any economy like that of the United States, there are three types of firms: private profit-making, government, and voluntary nonprofit enterprises. Nonprofit health care enterprises may arise where a sufficient minority of voters are dissatisfied with the quantity or quality of such services provided by the for-profit sector or government. Henry B. Hansmann expanded this idea and theorized that the nonprofit sector helps to repair the problems of contract failure that occur when the quantity or quality of output is difficult to observe. Lacking the ability to distribute net revenues, the nonprofits do not issue equity stock and lack this avenue for raising capital.
