Most Americans are scared of hospital bills, even if they are insured. But few may go as far as to check who owns these facilities, or if they have a new owner. A new paper by experts at the University of Pennsylvania Wharton School and elsewhere has found that a rapid increase in corporate ownership of hospitals in recent years has redefined their business models and how they price their services.

According to the paper, corporatization of hospitals — also called “system ownership” — has delivered higher profitability with higher prices and reduced operational expenses. Titled “The Corporatization of Independent Hospitals,” the paper is authored by Wharton professor of health care management Atul Gupta; Texas A&M School of Public Health professors Elena Andreyeva and Benjamin Ukert; Malgorzata Sylwestrzak, associate vice president at Humana Healthcare Research; and Catherine Ishitani, a doctoral student of health care management and economics at Wharton.

Hospital ownership in the US has seen “a rapid corporatization” over the past two decades. Total bed capacity owned by hospital chains — or systems — has raced from 58% in 2000 to 81% by 2020. Driving that trend is not just a desire for greater market power, but also increased profitability when corporate chains buy independent hospitals.

Taking off from that trend, the paper’s authors studied 101 independent hospital acquisitions by systems from 2013 to 2017, and prices for hospital inpatient services in 20 large states. The paper’s data sources included large commercial insurers, Medicare claims and patient discharges across all hospitals in New York State. The study also covered 135 acquisitions of system-owned hospitals by other systems.

The new corporate owners of formerly independent hospitals achieve high profitability by raising prices and cutting operating costs, mainly through staff cuts and lower financing costs, Gupta explained on the Wharton Business Daily radio show that airs on SiriusXM. (Listen to the podcast.) “The average acquired hospital increases its operating margin by about $14 million a year,” he said.

Staff reductions make up 60% of those cost savings, while another 20% comes from lower capital and financing costs. Since most of the savings come from reducing headcount, acquirers may be able to predict those savings with more certainty and plan to pass a portion of these savings to insurers, the paper stated.

The staff cuts are primarily in maintenance and support functions. “That makes sense because they can rely on support staff at the system level, and they don’t need to duplicate those functions, [such as in accounting or IT],” Gupta noted.

Quality of Care May Worsen after Corporatization

But corporatization — or system ownership — of independent hospitals has an underwhelming performance in patient outcomes. “We find no evidence that the quality of care improves [following system ownership of a hospital],” Gupta said. In fact, the quality of care may worsen in some cases — a pointer to that is an increase in short-term readmission rates on average after those acquisition deals. The readmissions were evident across different patient samples spanning multiple payers and disease groups. The study found “no detectable changes in short-term mortality or patient satisfaction.”

Although system ownership of hospitals may improve operating efficiency, the authors advised caution in interpreting reduced costs as improved productivity. That is because the increase in readmissions as the size of the firm grows may be an indicator of declining quality.

Gupta explained why the quality of care may suffer after corporatization. “While cutting back on staff creates some efficiencies, it might also disrupt the protocols that were already in place at a hospital,” he said. Cutbacks in nursing staff, social workers and case managers could affect the ability of the hospital to follow up on patients after they discharge from the hospital, he added. They could also adversely impact “some of those smaller things that play a big role in keeping people out of the hospital,” he noted. “That could be a reason why we see an increase in readmissions after these deals take place.”

Key Findings

• After an independent hospital is acquired by a corporate chain, it sees a 6% increase in the reimbursement per inpatient stay for commercially insured patients, the study estimated.
• That price increase varies from “negligible to 11%” across the top seven specialties by volume. Hospitalization for respiratory, central nervous system and cardiac diseases saw the largest increases.
• After corporatization, inpatient hospital revenue increases by an estimated $11,700 per bed.
• Total operating expenses decline by about $48,300 per bed at the acquired hospital following system ownership, not including any offsetting price increases.
• Based on those changes in revenue and expenses, the acquired hospital sees an average estimated increase in hospital operating profit of about $60,000 per bed per year.
• Acquired system-owned hospitals are less likely to be rural and non-profit, and more likely to be located in urban markets.
• System-owned hospitals enjoyed a much higher profit margin than independent hospitals, on average, perhaps reflecting their higher price levels.

How Cost Savings Are Shared for Hospital Expenses

The savings in operational costs are passed on to insurers in varying degrees. “In the deals where hospitals achieve larger cost savings, the price increases for insurers are smaller in magnitude,” Gupta said. “This is consistent with some passing through of efficiencies to insurers.” How much of that is then passed on to consumers through lower insurance premiums is an open question; the scope of the study did not include data on premiums.

“Notwithstanding such large cost savings, average prices for [privately insured] patients increase following system acquisitions, prompting the question of whether consumers benefit from cost savings at all,” the paper noted.

The increase in prices primarily affects people with private insurance; Medicaid and Medicare set prices unilaterally, which are not affected by changes in hospital ownership, Gupta said.

Medicare and Medicaid (and therefore taxpayers) may not share these gains immediately since they set reimbursement rates based on market-level average costs, the paper noted. However, in the long run, the authors expected greater corporatization to reduce market-level costs and growth in reimbursement rates for public payers as well.

From One Hospital System to Another

While the main focus of the paper is on corporatization of independent hospitals, a companion exercise looked at ownership transfers between two hospital systems, or from one corporate ownership to another. In those cases, the authors found a similar magnitude of price increases and suggested that those increases may be driven more by changes in market power.

However, the authors found “insignificant effects on operating costs, including no effect on employment or personnel spending” after deals between hospital systems. The reason for that is meaningful cost savings are available and extracted when an independent hospital is bought by a system for the first time, and not necessarily after subsequent ownership changes. Such system-to-system deals also have no effect on readmission rates.

Broader Significance of the Findings

The authors set the backdrop for the significance of their study: Hospital care accounts for $1.3 trillion in annual spending, and it is the largest segment in the $4.3 trillion US healthcare sector. Consumer prices for hospital care grew nearly 60% faster than those for prescription drugs and twice as fast as those for physician services. The paper also fills a research gap on the performance of chain ownership in health care – the last study to quantify the effects of hospital system ownership on prices, costs and quality covered deals ending in 2000.

With the corporatization of independent hospitals, “at least in theory, there’s the possibility that efficiencies are generated, and they might be passed on to insurers or consumers ultimately in the form of lower costs and therefore lower insurance premiums,” Gupta said. Those savings are not evident on a matching scale in ownership changes between hospital systems.

Justifications for Hospital Corporatization

The paper included a summary of the arguments by industry participants in favor of corporatization:

• First, independent hospitals expect that they will obtain easier access to capital for capacity, service expansions and upgrades after they are part of a larger corporate entity.
• Second, they anticipate reducing operating costs by leveraging the system’s scale, such as in procuring medical supplies and devices.
• Third is access to a larger and potentially better pool of managerial and clinical talent in the system.

Not all of those promises materialize in hospital corporatization deals. In fact, some deals have produced underwhelming outcomes. As an example, the paper cited the 2015 acquisition of Northern Westchester hospital in New York by Northwell, the largest hospital system and private employer in the state. It noted that “the anticipated capital infusions from Northwell did not materialize in a significant way, although Northern Westchester gained access to expert physicians at Northwell’s academic medical cHospitalReimbursement rates increased, “but the effects on quality and efficiency are not obvious,” the authors added. “This type of ambiguous evidence has led to a debate over the role of hospital systems, and more generally of corporatization, in health care.”

Room for Regulators

Hospital acquisition deals come under the regulatory purview of the Federal Trade Commission and the Department of Justice. But “their hands are tied” because the statutes they have to follow “narrowly define” the conditions that reduce competition, Gupta said. “[For instance], just the fact that prices go up is unfortunately not enough for them to take action,” he added.

“But regulators have become more vigilant,” Gupta continued. “The FTC has been more active [than earlier] in scrutinizing deals and potentially blocking them.”

Gupta pointed to Thomas Jefferson University’s 2018 plan to buy Einstein Health Care Network. The deal faced significant antitrust scrutiny from both the FTC and Pennsylvania’s attorney-general before it was cleared in 2021 after a court ruled against the FTC and Jefferson agreed to invest $200 million over seven years in Einstein’s North Philadelphia facilities, the Philadelphia Inquirer reported.

[Knowledge at Wharton first published this piece.]

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.