The comparative economic performance of investor-owned chain and not-for-profit hospitals

Abstract

We examined the differences in the economic performance of 80 matched pairs of investor-owned chain and not-for-profit hospitals in eight states during 1978 and 1980, and considered how their operating strategies might affect their relative success in a more price-conscious market. We found that total charges (adjusted for case mix) and net revenues per case were both significantly higher in the investor-owned chain hospitals, mainly because of higher charges for ancillary services; there were no significant differences between the two groups of hospitals in regard to patient-care costs per case (adjusted for case mix), but the investor-owned hospitals had significantly higher administrative overhead costs; investor-owned hospitals were more profitable; investor-owned hospitals had fewer employees per occupied bed but paid more per employee; investor-owned hospitals had funded more of their capital through debt and had significantly higher capital costs in proportion to their operating costs; and the two groups did not differ in patient mix, as measured by their Medicare case-mix indexes or the proportions of their patients covered by Medicare or Medicaid. We conclude that investor-owned chain hospitals generated higher profits through more aggressive pricing practices rather than operating efficiencies - a result not unexpected in view of past cost-based reimbursement policies. Recent changes in these policies are creating new pressures for cost control and moderation in charges, to which both types of hospitals must adapt. Neither type has a clear-cut advantage in the ability to make the necessary changes.