2001 benchmarking guide

Our fifth annual guide to benchmarking under managed care presents data that is a study in market dynamics and adaptation. New this year are financial indicators on HMOs exiting the market and those remaining. Hospital financial ratios and details on department performance are included. The physician group practice numbers show why physicians are scrutinizing capitated payments. Overall, hospitals in markets with high managed care penetration are more successful in managing labor costs and show productivity gains in imaging services, physical therapy and materials management.     

Organizational and Market Influences on Physician Performance on Patient Experience Measures

Objective. To examine the extent to which medical group and market factors are related to individual primary care physician (PCP) performance on patient experience measures. Data Sources. This study employs Clinician and Group CAHPS survey data (n=105,663) from 2,099 adult PCPs belonging to 34 diverse medical groups across California. Medical group directors were interviewed to assess the magnitude and nature of financial incentives directed at individual physicians and the adoption of patient experience improvement strategies. Primary care services area (PCSA) data were used to characterize the market environment of physician practices. Study Design. We used multilevel models to estimate the relationship between medical group and market factors and physician performance on each Clinician and Group CAHPS measure. Models statistically controlled for respondent characteristics and accounted for the clustering of respondents within physicians, physicians within medical groups, and medical groups within PCSAs using random effects. Principal Findings. Compared with physicians belonging to independent practice associations, physicians belonging to integrated medical groups had better performance on the communication ( p=.007) and care coordination ( p=.03) measures. Physicians belonging to medical groups with greater numbers of PCPs had better performance on all measures. The use of patient experience improvement strategies was not associated with performance. Greater emphasis on productivity and efficiency criteria in individual physician financial incentive formulae was associated with worse access to care ( p=.04). Physicians located in PCSAs with higher area‐level deprivation had worse performance on the access to care ( p=.04) and care coordination ( p<.001) measures. Conclusions. Physicians from integrated medical groups and groups with greater numbers of PCPs performed better on several patient experience measures, suggesting that organized care processes adopted by these groups may enhance patients' experiences. Physicians practicing in markets with high concentrations of vulnerable populations may be disadvantaged by constraints that affect performance. Future studies should clarify the extent to which performance deficits associated with area‐level deprivation are modifiable.     

Assessing the effect of increased managed care on hospitals

This study uses a new relative risk methodology developed by the author to assess and compare certain performance indicators to determine a hospital's relative degree of financial vulnerability, based on its location, to the effects of increased managed care market penetration. The study also compares nine financial measures to determine whether hospital in states with a high degree of managed-care market penetration experience lower levels of profitability, liquidity, debt service, and overall viability than hospitals in low managed care states. A Managed Care Relative Financial Risk Assessment methodology composed of nine measures of hospital financial and utilization performance is used to develop a high managed care state Composite Index and to determine the Relative Financial Risk and the Overall Risk Ratio for hospitals in a particular state. Additionally, financial performance of hospitals in the five highest managed care states is compared to hospitals in the five lowest states. While data from Colorado and Massachusetts indicates that hospital profitability diminishes as the level of managed care market penetration increases, the overall study results indicate that hospitals in high managed care states demonstrate a better cash position and higher profitability than hospitals in low managed care states. Hospitals in high managed care states are, however, more heavily indebted in relation to equity and have a weaker debt service coverage capacity. Moreover, the overall financial health and viability of hospitals in high managed care states is superior to that of hospitals in low managed care states.     

The effects of hospital-physician integration strategies on hospital financial performance.

STUDY QUESTION. This study investigated the longitudinal relations between hospital financial performance outcomes and three hospital-physician integration strategies: physician involvement in hospital governance, hospital ownership by physicians, and the integration of hospital-physician financial relationships. DATA SOURCES AND STUDY SETTING. Using secondary data from the State of California, integration strategies in approximately 300 California short-term acute care hospitals were tracked over a ten-year period (1981-1990). STUDY DESIGN. The study used an archival design. Hospital performance was measured on three dimensions: operational profitability, occupancy, and costs. Thirteen control variables were used in the analyses: market competition, affluence, and rurality; hospital ownership; teaching costs and intensity; multihospital system membership; hospital size; outpatient service mix; patient volume case mix; Medicare and Medicaid intensity; and managed care intensity. DATA COLLECTION/EXTRACTION. Financial and utilization data were obtained from the State of California, which requires annual hospital reports. A series of longitudinal regressions tested the hypotheses. PRINCIPAL FINDINGS. Considerable variation was found in the popularity of the three strategies and their ability to predict hospital performance outcomes. Physician involvement in hospital governance increased modestly from 1981-1990, while ownership and financial integration declined significantly. Physician governance was associated with greater occupancy and higher operating margins, while financial integration was related to lower hospital operating costs. Direct physician ownership, particularly in small hospitals, was associated with lower operating margins and higher costs. Subsample analyses indicate that implementation of the Medicare prospective payment system in 1983 had a major impact on these relationships, especially on the benefits of financial integration. CONCLUSIONS. The findings support the validity of hospital-physician financial integration efforts, and to a lesser extent the involvement of physicians in hospital governance. The results lend considerably less support for strategies built around direct physician ownership in hospitals, particularly since PPS implementation. RELEVANCE/IMPACT. These findings challenge prior studies that found few financial benefits to hospital-physician integration prior to PPS implementation in 1983. The results imply that financial benefits of integration may take several years after implementation to emerge, are most salient in a managed care or managed competition environment, and vary by hospital size and multihospital system membership.     

An early view of the impact of deregulation and managed care on hospital profitability and net worth

This study shows the impact of the removal of hospital rate regulation followed by the growth of managed care on hospitals' profitability and net worth. New Jersey emerged from a regulated prospective payment system in 1992. The transition to a freely competitive market structure had a negative impact on hospital profitability, net worth, patient length of stay, and other measures of capacity utilization. Similarly, the doubling of the HMO penetration rate in the state between 1995 and 1997 is shown to have negatively influenced hospital financial viability. Hospitals have responded in part by increasing usage of outpatient services. The use of discounted fee-for-service instead of per diem reimbursement for outpatient services provides an incentive for hospitals to favor outpatient over inpatient services. The effect of these changes is detailed, along with data showing that the larger discounts given by hospitals to managed care organizations, Medicare, and Medicaid played an important role in explaining the diminished profitability of hospitals.     

Financial performance of safety-net hospitals in a changing health care environment.

Safety-net hospitals serving the poor and indigent in inner-cities have received inadequate research attention regarding the determinants of their financial performance in the changing health care environment. We analyze how the 1990-92 financial performance of 275 such hospitals is related to exogenous and endogenous factors such as payer mix, service mix, staffing and ownership. Models of hospital financial performance are developed using operating margin, cost per discharge and revenue per discharge as measures of performance. Stepwise regression is used to test the model with data from the American Hospital Association (AHA) and Health Care Investment Analysts (HCIA). Results suggest that: 1) The profitability of inner-city hospitals appears positively related with technical complexity of care; 2) High interest and low operating surplus may constrain the addition of technically sophisticated services to enhance profitability; 3) There is some evidence that new governmental programs, e.g. Medicaid managed care and Medicaid Diagnosis Related Groups (DRGs), may not have improved operating margins, though Medicaid DRGs appear to have contained costs. Follow-up research is needed on this issue; 4) Given external fiscal realities, internal management strategies for inner-city hospitals require research, e.g. developing appropriate managed care systems and timely expansion of sub-acute services and; 5) Services such as AIDS treatment and community health education represent opportunities to respond to community needs, especially since unit cost of such services will decline with high volume.     

Strategic interaction among hospitals and nursing facilities: the efficiency effects of payment systems and vertical integration

Rising post-acute care expenditures for Medicare transfer patients and increasing vertical integration between hospitals and nursing facilities raise questions about the links between payment system structure, the incentive for vertical integration and the impact on efficiency. In the United States, policy-makers are responding to these concerns by initiating prospective payments to nursing facilities, and are exploring the bundling of payments to hospitals. This paper develops a static profit-maximization model of the strategic interaction between the transferring hospital and a receiving nursing facility. This model suggests that the post-1984 system of prospective payment for hospital care, coupled with nursing facility payments that reimburse for services performed, induces inefficient under-provision of hospital services and encourages vertical integration. It further indicates that the extension of prospective payment to nursing facilities will not eliminate the incentive to vertically integrate, and will not result in efficient production unless such integration takes place. Bundling prospective payments for hospitals and nursing facilities will neither remove the incentive for vertical integration nor induce production efficiency without such vertical integration. However, bundled payment will induce efficient production, with or without vertical integration, if nursing facilities are reimbursed for services performed.     

Responding to financial pressures. The effect of managed care on hospitals’ provision of charity care

Healthcare financing and insurance is changing everywhere. We want to understand the impact that financial pressures can have for the uninsured in advanced economies. To do so we focus on analyzing the effect of the introduction in the US of managed care and the big rise in financial pressures that it implied. Traditionally, in the US safety net hospitals have financed their provision of unfunded care through a complex system of cross-subsidies. Our hypothesis is that financial pressures undermine the ability of a hospital to cross-subsidize and challenges their survival. We focus on the impact of price pressures and cost-controlling mechanisms imposed by managed care. We find that financial pressures imposed by managed care disproportionately affect the closure of safety net hospitals. Moreover, amongst those hospitals that remain open, in areas where managed care penetration increases the most, they react by closing the health services most commonly used by the uninsured.     

HMO ownership pays off for systems that stick with it

HMOs and PPOs have been financial losers for many hospitals. In fact, problems controlling costs have driven many hospitals to sell or close HMOs and PPOs that they started to channel new business their way. But for those hospitals that invested the time and money needed to manage physician and ambulatory care networks, vertical integration of managed care is paying off.     

Integrated delivery networks: a detour on the road to integrated health care?

This paper reviews the rationales and evidence for horizontal and vertical integration involving hospitals. We find a disjunction between the integration rationales espoused by providers and those cited in the academic literature. We also generally find that integration fails to improve hospitals' economic performance. We offer seven lessons from hospitals' efforts to integrate and then suggest four alternative models for achieving integrated delivery of health care services.     

America''s Rural Hospitals: A Selective Review of 1980s Research

We review 1980s research on American rural hospitals within the context of a decade of increasing restrictiveness in the reimbursement and operating environments. Areas addressed include rural hospital definitions, organizational and financial performance, and strategic management activities. The latter category consists of hospital closure, diversification and vertical integration, swing-bed conversion, sole community provider designation, horizontal integration and multihospital system affiliation, marketing, and patient retention. The review suggests several research needs, including: developing more meaningful definitions of rural hospitals, engaging in methodologically sound work on the effects of innovative programs and strategic management activities--including conversion of the facility itself--on rural hospital performance, and completing studies of the effects of rural hospital closure or conversion on the health of the communities served.     

Medicaid managed care and provider consolidation

In the thrust toward constructing economic value, health care provider firms have been consolidating at a marked rate. Medicaid managed care programs have been rapidly emerging with the objectives of containing health care costs and improving services for beneficiaries. However, there are concerns that the trend toward achieving market efficiency through merger is largely incongruent with the economic and health value objectives of Medicaid managed care programs in the states. Discordance among value objectives arises primarily because of inefficient and market concentrating horizontal merger strategies employed by firms and disruptions in quality of care that occur during the transition to integrated health care systems. By promoting vertical integration strategies and filling in the quality gaps created by an active merger environment, Medicaid offices advance state objectives of cost containment and quality while recognizing that providers operate in a complex and competitive environment that necessitates consolidation for organizational survival.     

The impact of managed care penetration and hospital quality on efficiency in hospital staffing

The state of California has recently mandated minimum nurse-staffing ratios, raising concerns about possible affects on hospital efficiency. In this study, we examine how market factors and quality were related to staffing levels in California hospitals in 1995 (prior to implementation of the new law). We are particularly interested in the affect of managed care penetration on this aspect of hospital efficiency because the call to legislative action was predicated on fears that hospitals were reducing staffing below optimal levels in response to managed care pressures. We derive a unique measure of excess staffing in hospitals based on a data envelopment analysis (DEA) production function model, which explicitly includes ancillary care among the inputs and outputs. This careful specification of production is important because ancillary care use has risen relative to daily hospital services, with the spread of managed care and advances in medical technology. We find that market share (adjusted for size) and market concentration are the major determinants of excess staffing while managed care penetration is insignificant. We also find that poor quality (outcomes worse than expected) is associated with less efficient staffing. These findings suggest that the larger, more efficient urban hospitals will be penalized more heavily under binding staffing ratios than smaller, less-urban hospitals.     

Risk-sharing integration efforts in the hospital sector.

The extent of hospital involvement in integrated delivery systems (IDSs) during 1996 was assessed by a national sample of 235 short-term private general hospitals. Two out of five hospitals were participating in networks with some financial risk sharing, and another third reported membership in IDS networks without financial obligations. Managed care's presence was the only significant factor moving hospitals from a stand-alone status to network membership. The decision to share financial risk was influenced not only by managed care pressures, but also by the level of local hospital competition and the severity of the inpatient case mix.     

Hub-and-spokes regionalization. The teaching hospital should be the hub of its healthcare market

To remain viable, teaching hospitals must be horizontally and vertically integrated, multilevel healthcare delivery systems. Such integration is needed for a teaching hospital to remain the hub of its urban or rural regional healthcare market and to generate sufficient fiscal resources to support its medical education programs, research activities, quality of care, and innovative technology. Teaching hospital trustees, physicians, and managers must evaluate an increasing number of alternatives to improve quality of patient care, maximize educational and research opportunities, and increase revenues. These options include merging with community hospitals and improving relationships between community physicians and teaching hospitals and their full-time clinical faculty. To ensure long-term viability, teaching hospitals may need to use an approach that concurrently employs a hub-and-spokes arrangement, a horizontal and vertical diversification, and a multilevel healthcare delivery system configuration.     

Can productivity growth measures identify best performing hospitals? Evidence from the English National Health Service

Health‐care systems around the world face limited financial resources, and England is no exception. The ability of the health‐care system in England to operate within its financial resources depends in part on continually increasing its productivity. One means of achieving this is to identify and disseminate throughout the system the most efficient processes. We examine the annual productivity growth achieved by 151 hospitals over five financial years, using the same methods developed to measure productivity of the National Health Service as a whole. We consider whether there are hospitals that consistently achieve higher than average productivity growth. These could act as examples of good practice for others to follow and provide a means of increasing system performance. We find that the productivity growth of some hospitals over the whole period exhibits better than average performance, but there is little or no evidence of consistency in the performance of these hospitals over adjacent years. Even the best performers exhibit periods of very poor performance and vice versa. We therefore conclude that accepted methods of measuring productivity growth for the health system as a whole do not appear suitable for identifying good performance at the hospital level.     

Strategic integration of hospitals and physicians

A striking development in the healthcare market place has been the formation of strategic relationships between hospitals and physicians. Hospital-physician integration appears to be a response to rapidly expanding managed care health insurance. We examine whether integration lead to efficiency gains from transaction cost economies thereby allowing providers to offer managed care insurance plans lower prices or whether integration is really a strategy to improve bargaining power and thereby increase prices. We find that integration has little effect on efficiency, but is associated with an increase in prices, especially when the integrated organization is exclusive and occurs in less competitive markets.     

Henry Ford achieves smooth integration

Henry Ford saw the value of vertical integration early in the automobile industry and applied it to health care as well when he founded a hospital in 1915 that eventually would anchor the Henry Ford Health System. Provider components include hospitals, home health agencies, nursing homes, a managed care plan, physician practices, and freestanding outpatient surgery centers. Strong governance and information systems are key to successful integration.