Investor-Owned and Not-for-Profit Hospitals

Abstract

The growth of investor-owned hospital-management companies represents the most dramatic change in the hospital industry in recent years. Whereas supporters of investor-owned chains suggest that their growth is attributable to operating efficiencies, critics suggest that it has resulted from pricing and marketing strategies. Using data supplied by the California Health Facilities Commission, we compared the economic performance of investor-owned and not-for-profit hospitals in California. There were three principal findings. First, during the study period both costs and charges were higher in for-profit than in not-for-profit hospitals, measured on the basis of either patient-days or admissions. Second, the for-profit chains have used aggressive marketing and pricing strategies to generate high rates of profitability and growth. Finally, the payer class of patients did not differ specifically according to the hospital-ownership category. We conclude that the recent dramatic growth of investor-owned hospital chains is attributable to the employment of managerial strategies that were well suited to the reimbursement system in effect during the period studied. As a result of recent changes in federal and state reimbursement, many of these reimbursement-maximization strategies have become obsolete. Whether the investor-owned chains will be able to adapt rapidly to this new reimbursement environment remains to be seen.

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