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Health Care Costs and Financing

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Investor-owned and tax-exempt hospitals differ in their approach to diversification of services

The growth of managed care and the aging population have made subacute inpatient care a potentially attractive market for general acute care hospitals that wish to diversify their services. Hospitals that diversify into subacute care might offer such services as rehabilitation, skilled nursing care, hospice care, and other long-term care; treatment for psychiatric problems and chemical dependency; care for mentally retarded individuals or those with chronic diseases; and other specialized health care services.

Despite the potential benefits of branching out into subacute care, not all hospitals are pursuing this strategy and may not be equally good candidates for such diversification, according to a recent study. The study was supported by the Agency for Health Care Policy and Research (HS07047) and led by principal investigator Jeffrey Alexander, Ph.D., of the University of Michigan.

Dr. Alexander and his colleagues found significant differences in the average level of subacute care offered by investor-owned (IO) versus tax-exempt not-for-profit (NFP) hospitals. After controlling for selection bias, financial performance, risk, size, occupancy, and other variables, IO hospitals offered 31 percent less subacute care than NFP hospitals. Resource availability, as measured by hospital size, membership in a multihospital system, and the supply of nursing professionals, appeared to expedite the move into subacute care for both types of hospitals.

However, IO hospitals were more responsive than NFP hospitals to financial conditions in their decisions to invest in subacute care. IO hospitals that experienced relatively low financial returns began to offer more subacute services than more profitable IO hospitals. Among NFP hospitals, however, no relationship was found between measured financial returns and diversification into subacute care.

For more information see "Financial and organizational determinants of hospital diversification into subacute care," by John R.C. Wheeler, Ph.D., Jeffrey Burkhardt, Ph.D., Dr. Alexander, and Stephen A. Magnus, M.S., in the April 1999 issue of Health Services Research 34(1), pp. 61-81.

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