Assessing the effect of increased managed care on hospitals

Abstract

This study uses a new relative risk methodology developed by the author to assess and compare certain performance indicators to determine a hospital's relative degree of financial vulnerability, based on its location, to the effects of increased managed care market penetration. The study also compares nine financial measures to determine whether hospital in states with a high degree of managed-care market penetration experience lower levels of profitability, liquidity, debt service, and overall viability than hospitals in low managed care states. A Managed Care Relative Financial Risk Assessment methodology composed of nine measures of hospital financial and utilization performance is used to develop a high managed care state Composite Index and to determine the Relative Financial Risk and the Overall Risk Ratio for hospitals in a particular state. Additionally, financial performance of hospitals in the five highest managed care states is compared to hospitals in the five lowest states. While data from Colorado and Massachusetts indicates that hospital profitability diminishes as the level of managed care market penetration increases, the overall study results indicate that hospitals in high managed care states demonstrate a better cash position and higher profitability than hospitals in low managed care states. Hospitals in high managed care states are, however, more heavily indebted in relation to equity and have a weaker debt service coverage capacity. Moreover, the overall financial health and viability of hospitals in high managed care states is superior to that of hospitals in low managed care states.