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Financial Pressure and Competition: Changes in Hospital Efficiency and Cost-Shifting Behavior

HADLEY, JACK PHD*; ZUCKERMAN, STEPHEN PHD; IEZZONI, LISA I. MD, MSC

Original Article

Using data from the American Hospital Association and the Medicare program, the authors analyzed the effects of financial pressure and market competition on changes in several measures of performance of 1,435 acute care hospitals between 1987 and 1989. Over the observation period, the least profitable hospitals constrained their growth in total expenses to half that for the most profitable hospitals (13.3% versus 27.6%) by limiting the growth of their staffs and their total assets. These changes were associated with a reduction in inefficiency of 1.8% (11.2%) compared with a very slight increase in inefficiency for the highest profit group. Similarly, hospitals in highly competitive markets controlled expenses relative to those in the least competitive areas. However, they also experienced slower revenue growth than did less competitive hospitals so that, in relative terms, their profit rates fell. The authors found no evidence to suggest that financial pressures created by either low profits or market competition resulted in hospitals engaging in cost-shifting. The authors conclude that health care reforms or market forces that put financial pressure on hospitals can result in cost-containment and improved efficiency without significant cost-shifting.

*From Georgetown University, Institute for Health Care Research and Policy and the Department of Medicine, Washington, DC.

From The Urban Institute, Health Policy Center, Washington, DC.

From the Division of General Medicine and Primary Care, Department of Medicine, Harvard Medical School, Beth Israel Hospital, the Charles A. Dana, Research Institute, and the Harvard-Thorndike Laboratory, Boston, Massachusetts.

Address correspondence to: Jack Hadley, PhD, Georgetown University, Institute for Health Care Research and Policy, 2233 Wisconsin Ave. NW, Suite 525, Washington, DC 20007.

This study was funded by the Robert Wood Johnson Foundation, Princeton, NJ, grant no. 18023. The views expressed herein are those of the authors alone.

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