For-Profit Enterprise in Health Care (1986) / Chapter Skim
Currently Skimming:
4 Investor Ownership and the Costs of Medical Care
4 Investor Ownership and the Costs of Medical Care
Pages 74-96
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From page 74... ...
Ibe impact on the cost of acquisition of hospitals by forprofit chains is discussed next, followed by a review of what is known about cost differences Mat relate to the ownership of other types of health care facilities, such as nursing homes and freestanding ambulatory care centers. The chapter closes with the committee's conclusions.
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From page 75... ...
But hospitals have numerous "products," including many types of inpa tient services, outpatient services, ancillary services, and, at some'hospitals, educational and nonpatient care services. Even if the discussion is limited to inpatient services, these can be measured as admissions, days of care, and canny for patients with specific diagnoses.
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From page 76... ...
Thus the price for charge payers and certain cost payers includes a subsidy to patients who cannot or do not pay for the full costs of their care.2 Differences among institu tions in the amounts of uncompensated care that they provide are thus likely to affect their charges, unless the institution has ac cess to nonpatient care revenues with which to subsidize uncompensated care. For those concerned with the price of care for partic ular groups for instance, a privately in sured employee group- such price and cost shifting and resultant price differences are important.
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From page 77... ...
In 1983, when overall hospital occupancy was 73 percent, for-profit chain and for-profit independent hospitals had occu 77 pancy rates of 62 and 64 percent, respectively, lower than the 74 and 75 percent occupancy rates of not-for-profit chain and independent hospitals (Peter Kralovec, Hospital Data Center, American Hospital Association, 1985, unpublished data) .6 One study estimated that each additional percentage point of occupancy reduces operating expenses by $2.00 per case, total patient care expenses by about $2.50 per case, and general and administrative expenses by about $3.00 per case (Watt et al., 1986b)
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From page 80... ...
.8 Capital costs are incurred in the purchase, construction, and improvement of plant and the purchase of major equipment. For-profit chain hospitals operated with significantly higher capital costs relative to operating costs than did not-for-profit hospitals (Anderson and Ginsberg, 1983; Watt et al., 1986a,b)
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From page 81... ...
Four studies using data from different sources and years all show that routine daily room services were priced at or below expenses by all types of hospitals (Lewin et al., 1981; Watt et al., 1986a; Pattison and Katz, 1983; State of Florida Hospital Cost Containment Board, 19841.~° However, ancillary services appeared to be marked up to be highly profitable. In Florida in 1982, the markup for ancillary services at for-profit hospitals was 121 percent; at state hospitals, 88 percent; and at not-for-profit hospitals, 74 percent (State of Florida Hospital Cost Containment Board, 1984~.
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From page 83... ...
83 ~ _ ~ , ~ _ oo ~ ~ '- C,]
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From page 84... ...
hospitals Reports, California, vice revenue pitals 18 percent Florida, Texas less taxes per higher than not-for adjusted day profit hospitals be fore tax adjustment; 12 percent higher after tax adjust menta Sloan and Nonteaching hospitals Data reported to Net operating For-profit chain hos Vraciu (1983) under 400 beds Florida State Cost fiends per ad- pitals 2 percent Containment Board lusted patient higher than not-for dayb profit hospitals Net operating Difference not statisti fi~nds per ad- cally significant justed admis sionb Watt et al.
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From page 85... ...
The difference for margin on total revenues is smaller owing to the higher nonpatient care revenues received by not-for-profit hospitals. The smallest difference between for-profit and not 85 for-profit hospitals is in after-tax margins on total net revenues.
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From page 86... ...
As studies show, nonpatient care revenues and taxes paid have a substantial impact on the bottom line of both not-for-profit and for-profit hospitals. Comparing the profitability of hospitals by measures other than margin on total net (aDcer-tax)
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From page 87... ...
report on the costs associated with Hospital Corporation of America's 1981 acquisition of Hospital Affiliates International found a firstyear net capital cost increase of$55.2 million from the acquisition of the 54 Hospital Affiliates hospitals $62.5 million from interest, $8.4 minion from depreciation, minus $15.7 million in savings from a reduction in home office costs. GAO calculated Medicare cost increases at only two of the acquired hospitals, and estimated them to be nearly $600,000 in the year following acquisition (U.S.
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From page 88... ...
Nursing homes operate with a payment system that has not changed fimdamentally in recent years. Also, the nursing home business unlike the hospit~ business is marked by constraints on growth, imposed by regulation and by limited competition caused by high occupancy rates and lack of alternatives for long-term care.
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From page 89... ...
Finally, the data in Table 4.5 show chain for-profit nursing homes to have the highest before-tax profit per resident day after inclusion of nonpatient care revenues. Independent not-for-profit nursing homes had a negative bottom line.
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From page 90... ...
However, some states have moved to slow acquisition activity by limiting reimbursement for capital and interest costs. As in the tospi~l industry, chain grown in nursing homes has been achieved mainly through acquisi TA;BLE 4.6 Comparison of Average Nursing Home Expenditures per Patient Day in Major Cost Centers, State of Ohio, 1977 Type of Ownership ~ For-profit For-profit For-profit Individual Intrastate Interstate Not-for Ownership Chain Chain profit Cost Center (N = 382)
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From page 91... ...
In sum, for-profit nursing homes, operating with reimbursement that has similarities to the Medicare prospective payment system being implemented for hospitals but lacking the competition that hospitals are now confronting, operate with lower expenses but with similar charges than notfor-profit nursing homes. Lower for-profit expenses are in some cases the result of lower patient care expenditures, and there is some evidence that chain operations are more efficient in the provision of general and administrative services.
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From page 92... ...
The major sources of data today include Medicare costs reports, which are the only existing source of national hospital expense information; some very valuable state reporting systems; and regular surveys by organizations such as the American Hospital Association. No sources were identified for data on national nursing home expenses.
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From page 93... ...
Fours, data from nursing homes suggest that when payment levels are fixed on a per diem basis, for-profit institutions restrict expenses more than not-for-profit institutions, which have lower margins, obtain revenues from philanthropy, and have more chargepaying patients. The cost savings are obtained on patient care expenses, not on capit~ or administrative expenses.
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From page 94... ...
Although some predict that for-profit health care organizations will lead the way toward lower-cost care now that economic incentives reward such behavior, this should not be regarded as a forgone conclusion. Their expenses and prices have been higher in the past; they have high ongoing capital expenses because of past acquisition activities; their average lengths of stay are already shorter; they have Tower occupancy rates across which to spread fixed costs; they have less access to nonpatient care revenues; and they must not only earn a profit to stay viable but they must also pay taxes on these profits (as well as on their property.)
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From page 95... ...
. 'Adjusted daily census, adjusted patient day, and adjusted admissions reflect inpatient care adjusted to reflect the volume of outpatient care provided.
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From page 96... ...
Sugarman (1984) Private Nursing Homes in the U
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