|
Items in cart [1] |
Questions? Call 888-624-8373 |
| Copyright © 2009. National Academy of Sciences. All rights reserved. Terms of Use and Privacy Statement |
Below are the first 10 and last 10 pages of uncorrected machine-read text (when available) of this chapter, followed by the top 30 algorithmically extracted key phrases from the chapter as a whole.
Intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text on the opening pages of each chapter.
Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.
Do not use for reproduction, copying, pasting, or reading; exclusively for search engines.
OCR for page 290
For-Profit Enterprise in Health Care. 1986.
National Academy Press, Washington, D.C.
Response to financial Incentives Among Investor-
Owned and Not-for-Profit Hospices: An Analysis
Based onCalifornu Data, 1978 1982
Robert V. Pattison
This report presents findings from an in-
vestigation conducted for the Institute of Med-
icine's project on the implications of for-profit
organization in health care. The investigation
focuses on the dynamic aspects of financial per-
formance by the nonprofit (public and private)
and investor-owned (independent and "chain")
sectors of the hospital industry in California
over a 4-year period, from 1977-1978 to 1981-
1982. Data have been examined for 240 acute
care, fee-for-service (non-HMO) hospitals in
the 76 to 250 bed-size range.
The research is an extension and refinement
of a study by Pattison and Katz, "Investor-
Owned and Not-for-Profit Hospitals: A Com-
parison Based on California Data" published
on August 11, 1983 in The New England Jour-
nal of Medicine. In that study, utilizing Cali-
fornia Health Facilities Commission (CHFC)
data for 1978-1980 (CHFC Cycle 5), the au-
thors analyzed differences in financial pe~for-
mance by ownership class among small to
midsize urban hospitals.
Among the principal findings of that study
are the following:
· There was no evidence that investor-owned
(IO) hospitals were more cost effective than
nonprofit or public hospitals of comparable size
and service complexity. This was true for ei-
ther independent or multi-institutional affili-
ated (chain) IO hospitals, and was true whether
costs (operating expenses) were measured on
either a per-day or per-admission basis.
· The profitability and the growth of IO
chain sectors were attributed to an aggressive
use of pricing and marketing strategies.
· There was no evidence that ownership
per se was influential in the payer mix of pa
Dr. Pattison is Executive V-ice President of He Health
Services Research Foundation.
290
tients served (Medicare, Medicaid, and pri-
vate pay). Hospital size, location, and type
appeared to be the principal factors.
Those findings raised questions for further
investigation. In particular, issues were raised
regarding financial performance over time-
the ways in which the IO and not-for-profit
sectors of the industry had responded to fi-
nancial incentives. It is the purpose of this
study to examine these issues.
SUMMARY OF PRINCIPAL FINDINGS
The principal findings of the current study
are;
1. Corroborating our earlier study, no ev-
idence was found to support a hypothesis that
IO hospitals are more cost effective than their
private not-for-profit or public counterparts.
Operating costs per discharge were higher and
the rate of increase in operating costs over the
4-year period was at least as high for IO as for
not-for-profit facilities.
2. Higher operating expenses in IO hospi-
tals were attributable to overhead expenses.
Administrative and fiscal costs were higher as
a percent of operating expenses for the IO than
for the not-for-profit sector.
3. For all sectors, capital costs increased at
a rate in excess of other operating expenses
over the period. This was much more pro-
nounced in the IO independent sector than in
the others.
4. All of the sectors apparently became more
aggressive in their use of pricing strategies,
shifting inpatient revenues toward ancillary and
away from daily (room and board) services. Not
surprisingly, this phenomenon was more pro-
nounced in the IO sector, followed by the vol-
untary sector, and finally by public hospitals.
5. For nearly all financially important daily
OCR for page 291
HOSPITAL RESPONSES TO FINANCIAL INCENTIVES
and ancillary services, charges per service unit
(prices) were highest in the IO sector and low-
est in the public sector.
6. Over the 4-year period, operating mar-
gins improved for the IO chains, but remained
constant or deteriorated for the other sectors.
7. The mix of patients (Medicare, Medi-Cal,
and other) stayed relatively constant within
each sector over the period. There was little
difference between the voluntary and IO sec-
tors. Public hospitals cared for a significantly
greater share of Medi-Cal patients and a lesser
share of Medicare. Other (private-pay) pa-
tients also comprised relatively less of the vol-
ume for public hospitals.
8. Public hospitals provided a dispropor-
tionately large share of services to Medi-Cal
beneficiaries, both inpatient and outpatient.
The stringency of Medi-Cal reimbursement
during this period adversely affected their ability
to maintain break-even or profitable opera-
tions.
9. During the time period studied, the
principal acquisition targets for the IO chains
in California were independent IO hospitals.
10. As compared to nonacquired facilities,
the IO independent hospitals acquired were
typically older, more depreciated, unprofita-
ble facilities with higher than average uncol-
lectable charges. Following acquisition,
A. 1 .1-. . ~
291
respectively determined costs, and most pri-
vate payers paid billed charges.
We examined data for short-term, acute care,
fee-for-service (non-Kaiser) hospitals of be-
tween 76 and 250 beds. This selection method
eliminated teaching hospitals; large, complex
facilities; small and rural hospitals; and spe-
cialty hospitals or those with a long-term-care
emphasis. Four subsectors of the sample were
analyzed: voluntary not-for-profit (including
religious and secular), public (including city/
county and district), IO independent, and IO
chain hospitals.
As Table 1 illustrates, the method provided
a relatively homogeneous sample in terms of
bed size, occupancy, and length of stay. Fur-
thermore, the sample included most of the
California hospitals owned by the large, inves-
tor-owned national management companies
(referred to in this report as IO chains).
RESULTS
General Observations
Table 1 reflects major structural changes in
the California hospital industry. While the to
tal number of hospitals and beds in the sample
remained almost constant over the 4-year pe
riod (a net decline of 11 hospitals and 1,210
pronely unproved, bad debts were re- beds, or 5 and 3 percent, respectively), this
duced, and the accounting value of assets, debt, was not true within individual ownership cat
equity, and capital expenses increased dra- egories. The greatest growth, either in abso
matically. lute or percentage terms, was in the IO chain
11. The major source of capital for the ac- sector, which experienced a net increase of
quisition of hospitals by the IO chains was not seven hospitals and 1,066 beds. The greatest
ownership (or equity) capital, but new long- decrease was in the IO independent sector,
term debt. which experienced a decrease of 14 hospitals
and 1,795 beds. This suggests that the growth
of the IO chain sector was due principally to
acquisitions of IO independent hospitals, rather
than either voluntaries or publics. A detailed
analysis of the data revealed this to be true.
We identified nine hospitals acquired by the
major national management companies at some
time during the 4-year period studied. All nine
were acquired from independent IO hospitals
or from a small, regional multi-institutional
system. (A discussion of these hospitals as a
separate group follows in a later section of this
paper. )
Beds per hospital changed very little for any
DATA BASE AND METHODS
Our analysis is based on CHFC annual dis-
closure data. Three CHFC reporting cycles
were analyzed: Cycle 3 (fiscal years ending
between June 30, 1977 and June 29, 1978),
Cycle 5 (1979-1980), and Cycle 7 (1981-19821.
The 4 years examined in this study were those
preceding the implementation of revolution-
ary changes in hospital reimbursement in Cal-
ifornia. [During the time period covered by the
study, reimbursement for both Medicare and
Medi-Cal inpatient services was based on ret
OCR for page 292
292
FOR-PROFIT ENTERPRISE IN HEALTH CARE
TABLE 1 General Characteristics of Hospitals in the Study
Ownership Category
Investor-Owned Investor-Owned
CyclelVanable Alla Voluntary Public Independent Chain
Cycle 3 (1977-1978)
Number of hospitals242105335945
Beds35,37216,0165,2217,7896,346
Inpatient days (1,000s)7,8043,8031,2301,4391,333
Discharges (1,000s)1,276610193241231
Beds/hospital146153158132141
Occupancy (%)6065655158
Length of stay (days)6.16.26.46.05.8
Cycle 5 (1979-1980)
Number of hospitals236107324651
Beds34,76316,7834,9135,9517,116
Inpatient days (l,OOOs)7,6163,9371,1911,0451,442
Discharges (l,OOOs)1,230624187177242
Beds/hospital147157154129140
Occupancy (%)
Length of stay (days)6.26.36.45.96.0
Cycle 7 (1981-1982)
Number of hospitals231100344552
Beds34,16215,2835,4735,9947,412
Inpatient days (1,000s)8,1134,0161,4911,0641,547
Discharges (1,000s)1,388677246185280
Beds/hospital148153161133143
Occupancy (%)6572754957
Length of stay (days)5.85.96.15.75.5
aIncludes general acute care, non-Kaiser (HMO) hospitals between 76 and 250 beds.
Of the sectors during the time period studied.
For the most recent year (1981-1982), it ranged
from a low of 133 in the IO independent hos-
pitals to a high of 161 in the public hospitals.
Occupancy rates improved considerably for
both the voluntaries and publics over the pe-
nod, increasing respectively from 65 to 72 per-
cent and from 65 to 75 percent. This increase
came mostly between the finch and sixth cycles.
For the IO sector, this figure worsened slightly.
Lengths of stay declined for all sectors. The
figure was lowest for the IO chains (5.5 days)
and highest for the publics (6.1 days). Overall
hospital case-mi2` intensity and acuity mea-
sures were not available, so it is not possible
to say whether the increased lengths of stay
in the voluntaries and publics were attribut-
able to a more severe case load.
Profitability and Grown
The two most wiclely used measures of prof-
itability are operating margin (profits ex-
pressed as a percent of revenues) and return
on equity (profits expressed as a percent of
owners' investment). By either of these two
measures, the IO chain sector was the most
profitable and the public sector the least.
Table 2 reveals that operating margins, de-
fined here as net operating revenues divided
by total operating revenues, were highest for
the IO chains, followed in order by the vol-
untaries, IO independents, and publics. Pub-
lic hospitals consistently operated at a loss, and
this loss worsened over the period, from 11
percent in 1977-1978 to 14 percent in 1981-
1982. These operating losses were recovered
principally by public subsidies. Interestingly,
margins remained constant or deteriorated for
OCR for page 293
HOSPITAL RESPONSES TO FINANCIAL INCENTIVES
TABLE 2 Profitability, Assets, and Growth
Ownership Category
293
Investor-OwnedInvestor-Owned
Year/Variable All VoluntaryPublicIndependentChain
1977-1978
Operating margin .02.03- .11.02.08
Return on equity .08.08.oSa.08.12
Accounting age of facility
(yrs) 6.06.27.84.64.7
Invested capital (assets)
per bed61,278 68,597 57,249 34,109 79,467
Net plant, property, and
equipment per bed32,163 38,878 29,559 13,691 40,028
1979-1980
Operating margin.02 .03 - .09 .03 .06
Return on equity.10 .10 .06 .25 .16
Accounting age of facility
(yes)6.0 6.4 7.3 5.0 4.2
Invested capital (assets)
per bed75,740 86,829 74,388 40,852 79,694
Net plant, property, and
equipment per bed40,231 49,006 39,210 15,916 40,572
1981-1982
Operating margin
Retwn on equity
Accounting age of facility
(yrs)
Invested capital (assets)
per bed
Net plant, property, and
equipment per bed49,491
Percent growth ([year period
Dom EYE 6130177-6129178
to EYE 6130181-6129182)
Number of beds
Total invested capital
(assets)
Invested capital per bed
Net plant property and
equipment per bed
.01
.13
5.9
96,108
.03
.13
6.3
112,771
57,802
- .14
.05
7.8
90,208
47,991
51
57
53
57 65
64 58
48 62
.01
.10
4.2
59,382
24,857
-23
34
74
81
aReturn on equity is not a useful measure for public hospitals because many fail to report equity.
all but the IO chains, in which they increased
from 8 to 10 percent. The margins for the chains
in 1981-1982 were 10 times the average for the
cohort of hospitals studied.
Further attesting to the profitability of the
national IO chain hospitals is the figure on
return on equity. This increased dramatically
for these hospitals, from 12 percent to 27 per-
cent. Return on equity improved for all sectors
.10
.27
4.0
95,392
53,383
17
40
20
33
except for the publics. (The reader is cau-
tioned, however, that this measure has little
validity for public hospitals, which frequently
do not report equity capital on their balance
sheets.)
In the previous study, based only on 1979-
1980 data, net income (after tax profit) per
discharge was highest for the voluntaries, fol-
lowed in order by the IO chains, publics, and
OCR for page 294
294
IO indspc;~-'ents. Analysis of the three time
periods reveals a different pattern for 1977-
1978 and 1981-1982, with the IO chains high-
est, followed respectively by the voluntaries,
publics, and IO independents. This figure
showed little change for the publics over the
4-year period, rising by only $3 or 9 percent.
However, for the IO chains, the growth was
substantial, rising by $100 over the period or
a percentage increase of 149 percent.
The accounting age of facility figures dem-
onstrates that investment in depreciable assets
was talking place relatively silo,' rapidly in the
investor-ow~led sector than in the not-for-profit.
The age of these facilities' assets fell a little
over 4.5 years to just slightly over 4 years.
During the same time, the age of not-for-prof-
its increased slightly or remained the same.
Accounting age is computed by dividing ac-
cumulated depreciation by annual deprecia-
tion. It is an imprecise measure, and does not
distinguish between investment in new con-
struction and equipment or acquisition of an
existing facility by a new owner. Thus, the
purchase of relatively older IO independent
hospitals by the IO chains would have the ef-
fect of reducing the accounting age of each of
the two sectors, as these more depreciated
facilities were acquired and depreciation
schedules reestablished subsequent to the
change in ownership.
The growth in total assets was highest in the
publics, followed by the voluntaries, IO chains,
and IO independents. However, an exami-
nation of growth in assets per bed yields quite
different results. IO independents become the
highest (74 percent) and IO chains the lowest
(20 percent). This phenomenon, closely re-
lated to that discussed in the preceding par-
agraph, occurs because the IO chains were
acquiring relatively older and more depre-
ciated IO independent hospitals. Thus, as those
older hospitals' beds and assets were removed
from the books of the IO independent sector
and added to those of the IO chain sector (at
a value reIRecting the acquisition price), the
growth rate in assets per bed increased for the
former and decreased for the latter.
Whereas in 1977-1978 the IO chain hospi-
tals had the greatest investment in assets per
bed, by 1981-1982, investment was highest for
the voluntaries. This was due to the high rate
FOR-PROFIT ENTERPRISE IN HEALTH CARE
of growth in the voluntary sector. It is also
interesting to compare the publics with the IO
chains. In 1977-1978, public hospitals' assets
per bed were only 72 percent of the IO chains.
Because of the rate of investment in the public
sector, this figure had risen to 95 percent by
1981-1982. Thus, the public and voluntary
hospitals in this group, even though somewhat
older, became as heavily "capitalized" as the
IO chain hospitals, and significantly more so
than the IO independents.
Pricing Strategies
The growth of the IO chains has been at-
tributed to the aggressive and successful use
of pricing and marketing strategies rather than
to economies of scale or centralization, which
would have been reflected in lower cost per
day or per discharge. This study confirms this
finding and Farther demonstrates that (1) over
the time period studied, all ownership sectors
adopted a more aggressive pricing structure,
and (2) the IO chains were the leaders in adop-
tion of these strategies.
Gross patient revenues (patient charges) were
highest for the IO chains, followed by IO in-
dependents, voluntaries, and publics (Table
3~. For 1977- 1978, IO chain charges were 114
percent of the group mean, and by 1981-1982,
this had risen to 117 percent. In contrast, pub-
lic hospitals' average charges were 86 percent
of the group mean in 1977-1978, but had fallen
to 82 percent by 1981-1982.
As revealed in Table 4, the increase in the
ratio of inpatient ancillary to daily service
charges indicates that all sectors adopted a
pricing strategy in which ancillary services be-
came relatively more important as a revenue
source when compared to daily (room and
board) services. Two factors can explain this:
1. The decrease in length of stay for all sec-
tors, which may indicate either a more intense
case mix or more intense treatment modali-
ties, andlor
2. A more aggressive pricing strategy in
which an increasing proportion of revenues are
generated from the services win relatively less
price-elastic demand (inpatient ancillary ser-
vices).
OCR for page 295
HOSPITAL RESPONSES TO FINANCIAL INCENTIVES
TABLE 3 Charges, Deductions, Expenses, and Profits Her Adiusted Discharge
295
Ownership Category
Year/Variable
1977-1978
All Voluntary
Public
Investor-Owned Investor-Owned
Independent Chain
Gross patient charges 1,7771,7081,5361,9082,022
Deductions 231200198248328
Net patient revenue 1,5451,5081,3371,6601,694
Operating expense 1,5431,4921,5121,6431,576
Net income (profit) after tax 4755391468
1979-1980
Gross patient charges 2,3662,2552,0452,5272,783
Deductions 390314357394608
Net patient revenue 1,9771,9401,6882,1332,175
Operating expense 1,9691,9141,8952,0992,046
Net income (profit) after tax ~7082535165
1981-1982
Gross patient charges 3,0122,8942,4623,3993,527
Deductions 571495486625797
Net patient revenue 2,9412,3991,9762,7752,730
Operating expense 2,4392,3702,3042,7712,458
Net income (pro~t) after tax 991124225168
Percent increase (4-year period
from EYE 6130177-6129178
to FYE 6130181-6129182)
Gross patient charges
Deductions
Net patient revenue
Operating expense
Net income (profit) after tax
70
147
58
58
110
69
147
59
59
106
60
145
48
52
9
78
152
67
69
75
74
143
61
56
149
aAdjusted discharges are the total discharges times the ratio of total patient revenue (inpatient and outpatient)
to inpatient revenue.
Despite the shift across all sectors, however,
the intersectoral differences were still ex-
treme, with the most aggressive use of this
strategy employed by the IO chains, and the
least aggressive by the publics. It is tempting
to speculate that the profitability and financial
solvency of public hospitals could have been
improved by a more vigorous adoption ofthese
pricing strategies. However, it is unlikely that
the public hospitals could successfully have
employed these strategies given their rela-
tively small proportion of patients covered by
insurance plans that paid billed charges.
The relative importance of outpatient charges
was virtually unchanged over time for each of
the four ownership categories. As a percent of
inpatient charges, outpatient charges were twice
as high for the publics as for IO hospitals, with
voluntaries close to the IO sector and signifi-
cantly below the publics. Public hospitals care
for relatively more Medi-Cal patients (see Ta-
ble 5~. This accounts for much of the observed
difference since :\Iedi-Cal patients consume
relatively more outpatient services than the
population at large.
Tables 6 and 7 demonstrate the differences
in pricing strategies on a service-specific basis.
The importance of individual ancillary services
to the hospitals' revenues is illustrated by the
example of pharmacy, which comprised 9 per-
cent of patient charges in 1981-1982, or almost
half the revenues generated by medical/sur-
gical daily services. Pharmacy ranged in im-
portance from a low of 6 percent in the public
OCR for page 296
296
FOR-PROFIT ENTERPRISE IN HEALTH CARE
TABLE 4 Charge Structure: Ratios of Daily Service, Inpatient Ancillary, and
Outpatient Charges
Ownership Category
Year/Ratio
Investor-Owned Investor-Owned
All Voluntary Public Independent Chain
-
1977-1978
Inpatient ancillary/
daily services charges 1.18 1.07 0.92 1.44
Outpatient/inpatient charges 0.19 0.19 0.33 0.14
1979-1980
Inpatient ancillary/
daily services charges 1.27 1.25
Outpatient/inpatient charges 0.19 0.19
1981-1982
Inpatient ancillary/
daily services charges 1.43 1.33
Outpatient/inpatient charges 0.19 0.19
1.42
0.15
0.103 1.56
0.33 0.14
1.08 1.70
0.33 0.14
1.56
0.15
1.81
0.13
hospitals to a figure approximately double that,
12 to 13 percent in the IO sector.
Charges per unit of service for nearly all
services were uniformly higher in the IO sec-
tor than in either the voluntary or public hos-
pitals. Again, comparisons of individual services
between the IO and public hospitals reveal
extreme differences.
Operating Expenses
Table 3 confirms that operating expenses
per adjusted discharge in 1981-1982 were
highest for the IO independents, followed re-
spectively by the IO chains, voluntaries, and
publics. For all four sectors, this figure rose
by 58 percent over the 4-year period. This is
the equivalent of an average annual com-
pounded rate of about 12 percent. The rate of
increase was highest for IO independents (69
percent) and lowest for publics (52 percent).
Gross patient charges increased by 70 percent,
equivalent to an average annual increase of 14
percent. The range was from a low of 60 per-
cent Publics) to a high of 74 percent (IO chains).
These increases in charges, however, did not
translate directly into increases in patient rev-
enues, as deductions from revenue (which in-
clude Medicare and Medi-Cal contractual
allowances as well as charity care, bad debts,
and other contractual allowances) increased by
147 percent. Because of these deductions, the
growth in net patient revenues (amounts ac-
tually received for the provision of care) almost
exactly matched the growth in operating ex-
penses in the voluntaries and IO indepen-
dents. For the publics, revenues grew 4 percent
slower than expenses, and for the IO chains
the situation was reversed, with revenues
growing 5 percent faster than expenses.
In Table 8, we examined data for the major
expense categories of research, education,
general service (costs associated with laundry,
dietary, housekeeping, etc.), fiscal services
(accounting), administrative services (admin-
istration, taxes), and daily and ancillary ser-
vices (e.g., costs associated with pursing services
aIld ancillary departments). For the IO sector,
fiscal and administrative costs (which include,
in the case of the IO chains, allocated home
office costs) totaled between 28 and 30 percent
of operating expenses. For the not-for-profit
sector, these costs were 22 to 24 percent.
The IO chains, in support of their claims of
increased efficiencies (as reflected, for exam-
ple, in lower ratios of employees (full-time
equivalents or FIEs) per discharge, incurred
expenses for general services and daily and
ancillary services equal to $1,745 per adjusted
discharge in 1981-1982. These costs amounted
OCR for page 297
HOSPITAL RESPONSES TO FINANCIAL INCENTIVES
TABLE 5 Deductions from Revenue as a Percent of Total Patient Charges
Ownership Category
297
Year/Variable
Investor-Owned Investor-Owned
All Voluntary Public Independent Chain
-
1977-1978
Medicare contractual
allowance 7 6 4 7 9
Medi-Cal contractual
allowance 3 3 5 3 3
Charity O O O O O
Bad debt 2 2 2 2 2
Other 1 1 2 1 2
Toed deductions 13 12 13 13 16
1979-1980
Medicare contractual
allowance 9 8 5 9 13
Medi-Cal contractual
allowance 4 3 5 3 4
Charity O O 1 0 0
Bad debt 2 2 3 3 2
Over 1 1 3 1 3
Total deductions 16 14 17 16
1981-1982
Medicare contractual
allowance 10 10 6 10 14
Medi-Cal contractual
allowance 5 4 6 4 5
Charity O O 1 0 0
Bad debt 3 2 6 3 2
Other 1 1 1 1 2
Total deductions 19 17 20 18 23
to $1,801 for the voluntaries. Thus, the IO
chains experienced savings of $56 per adjusted
discharge in these two categories.
These savings may represent efficiencies at
the hospital level. However, fiscal and admin-
istrative costs were $119 less in the voluntaries
than in the IO chains. The net effect was a
savings of $63 per discharge in the voluntaries.
The same analysis holds for a comparison that
includes the publics and IO independents.
Patient Selection
Tables 5 and 9 reveal intersectoral differ-
ences in the relative importance of Medicare,
Medi-Cal and private-pay patients. Part A of
Table 8, which provides information on the
percentage of charges by payer category, is the
best indication of the volume of services con-
sumed by each category. It reveals that public
hospitals cared for a disproportionately high
share of Medi-Cal patients and a dispropor-
tionately low share of Medicare. This was true
for all years. There was relatively little differ-
ence between the other sectors.
Medicare contractual allowances are a re-
flection of (1) the percent of patient care pro-
vided to Medicare beneficiaries and (2) the
spread between charges and allowable costs
(as determined by the Medicare fiscal inter-
mediary). For each of the three cycles studied,
these allowances were highest for the IO chains,
followed by IO independents, voluntaries, and
publics.
As a percent of total charges, Medi-Cal con-
tractual allowances were highest for the pub
OCR for page 298
Daily services
Medicallsurgical acute 191
Medicallsurgical intensive
298
FOR-PROFIT ENTERPRISE IN HEALTH CARE
TABLE 6 Important Daily and Ancillary Charges as a Percentage of Total Patient
Charges, 1981-1982
Ownership Category
Investor-Owned Investor-Owned
All Voluntary Public Independent Chain
Year/Vanable
Daily services
Medical/surgical acute
Psychiatric acute
Obstetrics acute
22 24 20 20
4
2
3
2
Medical/surgical intensive care 4 4
Coronary intensive care 2 2 2
Total daily servicesa 35 37 36
Ancillary services
Clinical labs
Pharmacy
Diagnostic radiology
Surgery
l
4
1
32
8 7 7 11
9 7 6 13
6
6
5
65 63 64 68
Central service and supply 6
Emergency
Inhalation therapy
Total ancillary servicesa
4 5
6
5
3
3
3
_
19
4
31
9
12
4
6
9
3
4
69
aIndividual service figures do not equal total figure because minor services are not included in the table.
lies, followed respectively by the IO chains,
then the voluntaries arid IO independents. The
reason for this difference was the relatively
greater percent of Medi-Cal patients served
in public hospitals as well as the greater per
cent of revenues derived from outpatient ser-
vices. (Medi-Cal paid for outpatient services
according to a fee schedule, which was lower
Man accounting costs for most hospitals and
significantly lower than billed charges.)
TABLE 7 Patient Charges per Unit of Servicea for Important Daily and Ancillary
Services, 1981-1982
Ownership Category
Investor-Owned Investor-Owned
Year/Variable All Voluntary Public Independent Chain
192
180
200
care 464 463 419 479 486
Ancillary services
Clinical labs 0.98 0.92 0.71 1.24 1.19
Pharmacy 49.34 40.20 22.18 84.11 85.14
Diagnostic radiology 7.28 6.90 7.43 8.92 6.79
Surgery 4.65 4.43 3.53 6.07 5.22
Central service and supply 32.26 24.95 16.21 44.00 58.85
Emergency 46.80 44.41 41.96 57.49 52.65
Inhalation therapy 16.46 17.78 12.79 16.10 16.98
aUnits of service are defined by the California Health Facilities Commission.
OCR for page 299
HOSPITAL RESPONSES TO FINANCIAL INCENTIVES
TABLE 8 Operating Expense Structure as a Percentage of Total Operating Expenses
Ownership Category
299
Investor-Owned Investor-Owned
Year/Expense Category All Voluntary Public Independent Chain
1977-1978
Research O O O O O
Education 0 0 2 0 0
General service 14 IS 15 13 13
Fiscal service 7 7 8 6 7
Administrative 20 18 16 25 22
Daily and ancillary service 59 60 59 56 58
1979-1980
Research 0 0 0 0 0
Education 0 0 2 0 0
General service 14 15 IS 13 13
Fiscal service 7 7 8 6 7
Administrative 19 17 IS 23 22
Daily and ancillary service 60 61 60 59 58
1981-1982
Research O O O O O
Education 1 0 2 0 0
General service 13 14 14 12 12
Fiscal service 5 4 5 4 6
Administrative 21 20 17 26 22
Daily and ancillary service 61 62 61 58 59
Finally, the previous study noted the ab-
sence of charity care provided by this cohort
of hospitals. Table 10 confirms that finding.
However, broadening the definition of uncom-
pensated care to include bad debts as well as
charity reveals the public hospitals to be sig-
nificantly more involved in this effort, with
allowances equal to 7 percent of total charges
in 1981-1982, compared to 3 percent in the
nearest sector. This figure rose from 2 percent
in 1977-1978, when publics were identical to
the other sectors, and was accounted for en-
tirely by an increase in the bad debt compo-
nent. The data do not reveal whether this was
due to the recession environment during 1981-
1982 or to less aggressive management of ac-
counts receivable, but it is clear that bad debts
became a significant problem for the public
hospitals over the period.
Hospitals That Changed Ownership
During the Period
Our previously published study based on a
single year's data (1979-1980) left unanswered
two critical questions: What were the financial
characteristics of hospitals acquired by the IO
chains during the preprospective payment sys-
tem environment? What financial changes did
these hospitals undergo in the years imme-
diately following acquisition?
We were able to identify definitively nine
hospitals which, during our study period, went
from IO independent (freestaD ding) to IO chain
status through acquisition. While a sample of
nine is ail insufficient number upon which to
base sweeping conclusions, the comparison of
these hospitals with their other IO colmter-
parts, presented in Table 10, is instructive.
The table presents comparative figures for 1977-
1978 and 1981-1982 for IO hospitals that re-
mained independent throughout the period,
IO independent hospitals acquired by a na-
tional chain at some time dunng the period,
OCR for page 300
300
TABLE 9 Patient Mix and Contractual Allowances
Ownership Category
-
FOR-PROFIT ENTERPRISE IN HEALTH CARE
Investor-Owned Investor-Owned
Year/VanableAll Voluntary Public Independent Chain
Part A: Percent of Gross Patient Charges by Payer Class
1977-1978
Medicare 37 40 29 35 38
Medi-Cal 16 13 27 16 14
Other 47 47 44 50 48
1981-1982
Medicare 41 44 31 41 43
Medi-Cal 16 14 29 13 13
Other 43 42 40 46 44
Part B.: Contractual Allowances as Percent of Charges to Each Payer
1977-1978
Medicare 1816 13 19 25
Medi-Cal 21211 19 20 25
Other 75 9 7 7
All payers 1312 13 13 16
1981-1982
Medicare 2523 18 24 32
Medi-Cal 2829 20 27 40
Other 107 21 9 8
All payers 1917 20 17 23
Part C: Percent of Net Patient Revenues by Payer Class
1977-1978
Medicare 35 38 29 32 34
Medi-Cal 14 12 25 14 13
Over 51 51 45 53 53
1981-1982
Medicare 38 41 32 37 38
Medi-Cal 14 12 28 12 10
Other 48 47 40 51 52
and IO hospitals owned by a chain throughout
the 4-year period.
The table reveals that
· Pre-acquisition, the purchased hospitals
were somewhat older, under-capitalized facil-
ities as compared to either the nonacquired
IO independents or previously acquired IO
chain hospitals.
· They were unprofitable, incurring after-
tax losses of $1.38 per day. This is compared
to daily profits of $3.00 for the independents
and $11.72 for the chains.
· Their losses were attributable at least in
part to three factors: (1) low occupancy rates
(48 percent), (2) high daily expenses ($286 ver-
sus $274 for each of the other groups), and (3)
a relatively high level of uncollectable ac-
counts (2.7 percent of billed charges).
· Investment per bed was the lowest of the
three subsectors and, correspondingly, these
hospitals were carrying little debt. Of course,
given their unprofitability, low occupancy, and
relatively high cost, they would not have been
attractive prospects for lenders.
OCR for page 301
HOSPITAL RESPONSES TO FINANCIAL INCENTIVES
TABLE 10 Comparison of Financial Indicators, Investor-Owned Hospitals, 1977-1978
and 1981-1982
301
1977-1978 1981-1982
Variable Independent Acquired Chain
Independent Acquired Chain
Number of hospitals5094545943
Occupancy (%)514858495059
A6cer-tax profits per day3.00- 1.3811.124.3923.7032.00
Bad debts (% of charges)2.42.71.63.20.22.6
Inpatient charges per day ($)317334351591631639
Total expenses per day ($)274286274482467441
Capital costs per day ($)121123345539
Assets per bed ($)34,40132,56579,46759,38298,83294,687
Debt per bed ($)10,9917,76734,83223,845s7, 67838,684
Accounting age (yrs)4.64.84.74.22.74.3
· About 2.5 years following acquisition, on
average, a dramatic turnaround became evi-
dent. This group's average daily profits not
only recovered, but rose to $23.70. This com-
pares to $4.39 for those hospitals remaining
independent throughout the period.
~ This increase in profitability was not at-
tributable to filling empty beds; occupancy rates
remained almost the same, rising only to SO
percent.
· A significant factor in their turnaround
was the extraordinary drop in bad debts to only
0.2 percent of total charges. Unfortunately,
data do not reveal whether this decrease was
due exclusively to more aggressive manage-
ment of accounts receivable, or whether pol-
icies were instituted to deny all but emergency
services to unsponsored patients (those with-
out private insurance or government program
coverage).
· The companies appear to have instituted
operating cost efficiencies. Daily expenses for
this group, which were $12 more than the non-
acquired hospitals in 1977-1978, became $15
less than the still-independent hospitals in 1981-
1982.
· The accounting value of assets per bed
increased Tom $32,565 in 1977-1978 to $98,832
4 years later. A significant share ofthis increase
was the revaluation of assets to fair market
value (typically acquisition cost) upon change
of ownership. Another part was due to new
construction and equipment added after ac-
quisition. A detailed analysis of each hospital's
books would be necessary to reveal the im-
portance of each.
· These new asset values were financed
principally by additional debt. In 1977-1978,
the debt-to-asset ratio (obtained by dividing
debt per bed by assets per bed) was 0.24 for
this group compared with 0.32 and 0.44 for
the independent and chain groups, respec-
tively. By 1981-1982 this ratio had risen to 0.58
for this group compared with 0.40 and 0.41 for
the independent and chain groups, respec-
tively.
· Partly as a consequence of this new debt,
capital costs rose from 4 percent of total ex-
penses to 12 percent. This figure includes de-
preciation expenses on the newly revalued
facility as well as interest costs on the debt.
These observations are consistent with in-
tuitive and anecdotal evidence regarding pur-
chases of independent IO hospitals by the chains
during the late 1970s and early 1980s. The
policy implications are less clear, especially as
Me hospital industry enters a new financial
environment in which the targets for acqui-
sition appear increasingly to be more complex,
larger teaching facilities.
CONCLUDING STATEMENT
The results of this study confirm most of the
findings of our previous study (and others, e.g.,
those of Lewin and Associates and the Florida
Cost Containment Board). In addition, these
OCR for page 302
302
results, by demonstrating the more vigorous
response of the IO sector to the previous cost-
based incentives reimbursement system, help
to shed light on what we may expect in the
new reimbursement environment being im-
plemented in California and in may other parts
of the United States.
If the IO sector, as demonstrated in our
analysis, is quickest to respond to these new
incentives, we may expect its growth to con-
tinue or even to accelerate. Until now, targets
for acquisition in California have been con-
fined primarily to smaller, independent, IO
hospitals. However, we may expect to see ac-
quisitions occur among larger, complex, teach
FOR-PROFIT ENTERPRISE IN HEALTH CARE
ing facilities as these institutions find themselves
in financial difficulty. These facilities have tra-
ditionally borne much of the burden of pro-
vision of"unprofitable" services and care of
unsponsored patients. Whether these services
will continue to be provided and these patients
to be sewed at historical levels is unclear.
ACKNOWLEDGMENTS
This analysis was supported by a grant from
the James Irvine Foundation, San Francisco,
California. The author wishes to acknowledge
with gratitude the assistance of Piruz Alemi.
Representative terms from entire chapter:
patient charges
