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Health Care Costs and Financing

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Hospitals in health systems with unified ownership or in centralized networks do better financially than others

By 1995, 71 percent of U.S. hospitals belonged to health networks or systems. There has been considerable debate on the financial advantages of unified ownership typical of health systems relative to the looser contractual or alliance-based strategies of health networks. A recent study, supported by the Agency for Healthcare Research and Quality (HS09524), sheds some light on the issue. It shows that hospitals in health systems with unified ownership generally had lower costs, higher profitability, and a more modern infrastructure than contractually based health network hospitals. Also, hospitals belonging to highly centralized networks, which organize the delivery of hospital services, physician arrangements, and insurance products for affiliated hospitals, did better financially than those belonging to more decentralized networks.

The researchers based their analysis on American Hospital Association data and classification of 1994 and 1995 health networks and systems. They drew on organization and economic theory to develop and test the influence of these organizational relationships on hospitals' financial performance. Results showed that health network hospitals had significantly higher costs ($52.7 million) relative to health system hospitals ($51.8 million).

Additionally, health network hospitals had lower profits relative to health system hospitals (4.1 vs. 5.11 percent total margin and 4.2 vs. 5.6 percent return on assets). Both types of hospitals were fairly efficient at generating revenues from fixed assets, but health system hospitals had relatively newer bases of assets (average facility age of 7.3 vs. 7.8 years).

Centralized health network hospitals had the lowest costs ($38.2 million) when compared with decentralized network hospitals ($52.2 million) and independent network hospitals ($69.6 million). Hospitals in centralized health networks were the most profitable (6.34 percent total margin and 6.62 percent return on assets), and hospitals in independent hospital networks were the least profitable (3.93 percent total margin and 2.17 percent return on assets).

More details are in "The financial performance of hospitals belonging to health networks and systems," by Gloria J. Bazzoli, Ph.D., Benjamin Chan, Ph.D., Stephen M. Shortell, Ph.D., and Thomas D'Aunno, Ph.D., in the fall 2000 Inquiry 37, p. 234-252.

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