FOR PROFIT HEALTHCARE

Study finds cost benefits to system ownership of hospitals — but at a possible risk to quality

Texas A&M University

Large hospital systems control eight out of 10 hospital beds in the United States—and they continue to grow—but little has been known until now about how system ownership affects hospital operations.

To learn more, Benjamin Ukert, PhD, and Elena Andreyeva, PhD, both with the Texas A&M University School of Public Health, worked with colleagues from the University of Pennsylvania, Wharton School and Humana to study more than 100 independent hospitals that entered system ownership. Their findings were published in the Journal of Political Economy Microeconomics.

“Can large health care provider chains increase operating efficiencies while maintaining quality of care?” Ukert said. “This is the key question.”

Ukert said research in other market sectors found that stand-alone establishments gain some benefits from joining chains, such as brand reputation and access to capital and best practices. On the other hand, large organizations often raise their prices, which can reduce efficiency.

In the hospital industry, multiunit firms—or systems—now dominate, largely the result of acquiring independent hospitals in a process the researchers call corporatization. System control of the nation’s hospital beds increased from 58 percent in 2000 to 81 percent by 2020, with similar growth in the share of employment.

For their study, the researchers used four data sources from 2012 to 2018:

• Annual surveys from the American Hospital Association to track changes in hospital ownership, capital and labor inputs, operating expenses and service portfolio breadth
• Medicare fee-for-service claims and all-payer hospital discharge data from New York State to ensure a broad examination of changes in hospital quality
• Administrative claims data on individuals enrolled in employer-sponsored plans with Elevance Health (formerly Anthem), one of the largest health insurers in the United States
• Various public use files from the federal government.

The researchers compared changes in patterns at hospitals that were acquired by systems (whether originally stand-alone hospitals or those acquired from other systems) during the years studied to the patterns of hospitals that did not change ownership. They also limited their comparison hospitals to those that matched the acquired hospitals closely on attributes such as number of beds, operating cost per bed, profit type and rural county status.

“We found that system ownership leads to a price increase of 6 percent overall, with relatively large price increases in deliveries, cardiac care and respiratory care,” Ukert said. “There were two dimensions with wider variation in consumer prices: targets that were at a greater disadvantage at baseline (because of their size or price level), which appeared to benefit more from system acquisitions, and within-market deals that led to greater price increases.”

A similar differential price increase was found in cases where the target hospital was already system owned, which suggests that system ownership does not provide an advantage in price negotiations with insurers.

“This could mean that these price increases may be driven more by traditional antitrust concerns about market power rather than by increases in the target’s bargaining power,” Ukert said.

The team found no changes in patient volume at target hospitals following the transition to system ownership.

“This suggests that patient perceptions of hospital quality did not change, which aligns with what other recent studies have found,” Ukert said.

The researchers found that corporatization of hospitals does confer large operating-cost benefits to the newly acquired target hospitals that are more valuable than the increase in revenue through higher prices, mainly resulting from lower capital costs and the reduction in staffing.

“Corporatization itself improves efficiency, and larger acquirers obtain significantly greater reductions in costs when they acquire independent hospitals,” Ukert said. “For each dollar of savings on personnel expenses, expected commercial revenue is reduced by 30 cents through lower prices, and in the long run, greater corporatization should reduce market-level costs and growth in reimbursement rates for public payers as well.”

On the other hand, the study found an increase in short-term readmission rates across three different patient samples spanning multiple payers and disease groups—likely resulting from the decline in staffing—which suggests that system ownership does not improve hospital quality and may actually reduce it.

“Most studies of this type have focused on deals involving two independent hospitals in the same local market that either merge or form a new system, or include multiple types of deals, including acquisitions by systems,” Ukert said. “Our focus on corporatization gives policymakers additional considerations regarding expansions of system ownership.”

By Ann Kellett, Texas A&M University School of Public Health

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Journal

Journal of Political Economy Microeconomics

DOI

10.1086/730454 

Method of Research

Data/statistical analysis

Subject of Research

People

Article Title

The Corporatization of Independent Hospitals