The Comparative Economic Performance of Investor-Owned Chain and Not-for-Profit Hospitals

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. (N Engl J Med 1986;314:89–96.), Hospital management companies are big businesses that are growing bigger. In the past decade, although the total number of hospitals in the United States has remained about the same, the proportion of hospitals that are affiliated with investor-owned chains has increased by 80 percent. This is roughly equivalent to the decrease during that period in the number of free-standing for-profit hospitals.^1,2 Many commentators have voiced concern over the growth in the delivery of hospital care for profit by the chains, alleging that investor-owned hospital groups select less complex cases and patients who are better able to pay for their care.