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Hospital Ownership Types and Impacts on Healthcare Finance

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There are many strategies that hospitals pursue to improve their operating performance

Some of these strategies are more committed or permanent in nature, e.g. location decisions. Hospitals can choose to locate in more affluent neighborhoods and reduce the proportion of uninsured patients. Hospitals pursue different types of investment strategies; they use mergers and acquisitions as a strategy to obtain market power and increase prices, or alter their product-mix in favor of profitable patients. Hospitals also shift costs from one patient-type to another – such as from less profitable patients to the more profitable patients. Some hospitals change their ownership-type from non-profit to for-profit and vice versa and implement significant changes to their operating strategy.

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The hospital industry in the United States is one of the few sectors where three different types of ownership have co-existed for decades. Numerous studies have investigated whether private not-for-profit, for-profit, and government hospitals differ in patient outcomes, costs, provision of uncompensated care, or other measures of hospital performance. Conflicting empirical results, however, have left policymakers with little clear evidence and have limited our understanding of ownership and performance in the health sector. Understanding whether profit status or public/private control affects performance is important for many policy issues. Much of current policy governing for-profit conversions in the health care market assumes that government and not-for-profit hospitals differ from for-profits in policy-relevant ways, such as providing greater access through more uncompensated care. The debate over tax exemption focuses on the issue of whether tax-exempt hospitals are any different from tax-paying hospitals. Anyone setting out to assess the impact of an ownership-related policy change, such as the tax exemption policy for not-for-profit hospitals, immediately finds that the voluminous literature on not-for-profit, for-profit, and government hospitals gives frustratingly unclear and contradictory evidence, inviting subjective and selective reference to studies that support the analysts’ views.Apparently the majority of researchers in this field consider ownership to be a potentially important factor for explaining variation in hospital performance. Both studies focusing on ownership comparisons and those that merely include ownership as a control variable report widely varying results about the association between ownership and financial performance.

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Since the 1920s policymakers have been concerned with growing health care costs and seeking to contain costs by adopting new regulations to control hospital rate, restrict investment, and limit medical procedures (Dranove D, White W., 1998). Many policymakers began to advocate for market-based healthcare systems, in which hospitals have the freedom to set the quantity and quality of service delivery. However, there is a growing concern that the profit driven motives of hospitals may do more harm than good to patients, and earlier evidence has shown that a market-based healthcare system sometimes has a deleterious effect on service quality. Interestingly, in recent years some hospitals have been performing well in both financial and quality measures. For instance, in the quote at the beginning of this article, EMH Regional Medical Center, an Elyria, Ohio-based nonprofit hospital, not only profited from the lucrative heart procedures but also provided good health care services to their patients. The research question naturally arises as to how exactly the long term uncertainty of revenues and costs faced by the hospitals and the new financial performance-driven strategy undertaken by the management could potentially impact the quality of care received by their patients (Valvona J, Sloan F., 1988). From a conceptual perspective, hospitals select a particular level of service quality to provide based on the value patients place on quality and the costs of producing that

Hospitals can generate more profits from the extra service revenue by offering higher quality services when patients’ marginal valuation of quality increases with price. While the pursuit of profit induces hospitals to improve the quality and quantity of services they offer, the lack of financial strength results in a lower standard of health care services. Because profit is the difference between revenues earned and costs incurred from providing services, the key condition is that hospitals are capable of controlling costs and maintaining (or improving) the quality of care. Therefore, the net effect of hospital profitability on care quality can be either positive or negative, depending on the magnitude of each factor. To improve service quality and in turn attract more business, hospitals may need to invest in hospital infrastructure, medical equipment, and information technology. Physicians are more likely to refer patients to high-quality facilities and patients may be attracted to these facilities because hospitals offering great amenities and up-to-date technology are perceived as being committed to quality outcomes.

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In either case, future research can be most fruitful if it goes beyond the standard administrative datasets to explain this wide variation in performance both with more in-depth data about the “black box” of hospital decision-making and with analysis of market spillover effects

Our current exploration of the literature between non-financial performance measures and hospital ownership would provide further insight about ownership behavior differences. Evidence from other countries can also contribute significantly to furthering our understanding of ownership and behavior.

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Spence AM. Monopoly, quality and regulation. Bell J Econ. 1975;6:417–429.

Dranove D, White W. Medicaid-dependent hospitals and their patients: How have they fared? Health Serv Res. 1998;

Newhouse J. Toward a theory of nonprofit institutions: an economic model of a hospital. Am Econ Rev. 1970;60:64–74. [Google Scholar]

Wedig G, Sloan F, Hassan M, Morrisey M. Capital structure, ownership, and capital payment policy: the case of hospitals. J Financ. 1988;

Valvona J, Sloan F. Hospital profitability and capital structure: a comparative analysis. Health Serv Res. 1988

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