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Hospital Financial Conditions and the Provision of Unprofitable Services

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Abstract

Increases in hospital financial pressure resulting from public and private payment policy may substantially reduce a hospital’s ability to provide certain services that are not well compensated or are frequently used by the uninsured. The objective of this study is to examine the impact of hospital financial condition on the provision of these unprofitable services for the insured and uninsured. Economic theory provides the conceptual underpinnings for the analysis, and a longitudinal empirical analysis is conducted for an eight-year study period. The results indicate that not-for-profit hospitals with strong financial performance provide more unprofitable services for the insured and uninsured than do not-for-profit hospitals with weaker condition. For-profit hospital provision of these services is not influenced by their financial condition and instead may reflect actions to meet community expectations or to offer a sufficiently broad service array to maintain the business of insured patients.

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Notes

  1. Maternity cases that did not involve complications became an attractive business for hospitals, especially given enhancements in Medicaid payment and eligibility (Gaskin et al. 2001). Thus, we excluded these cases from our analysis.

  2. Horwitz (2005) and others have also identified AIDS services as unprofitable. However, these services were increasingly provided on an outpatient basis during the study period. Our data focuses strictly on inpatient care; thus, we excluded AIDS hospitalizations from our study.

  3. About 50% of hospitals were missing annual depreciation expense data in 2003. We decided to use 2002 reported depreciation expense when 2003 data were missing. This strategy made sense given examination of annual depreciation expense for the adjacent years between 1996 and 2002. Specifically, we found that the year-to-year correlations in this variable was .95 or higher.

  4. Reporting errors in the CMS financial data are well recognized (Kane and Magnus 2001). To deal with potential measurement error that may bias our results, we examined year-to-year changes in the financial data to see if unusually large changes (e.g., big increases or declines) occurred. Based on our analysis, we decided to set annual values of measures to missing if extreme fluctuations occurred (defined as the mean annual change plus or minus 3 standard deviations). Overall, this affected 11.6% of our observations.

  5. These percentiles were based on the pooled financial data from 1996 to 2003.

  6. The historical data files we had lacked HMO penetration data for Washington and Wisconsin in the years 1996 and 1997. Given this, we used data on HMO penetration in 1998 for 1996 and 1997 in these two states.

  7. Data for the ratio of Medicaid beneficiaries to the poor population in a state were only available beginning in 1999. Thus, we used the 1999 values of these variables for earlier years in the study states.

  8. California implemented the Family Planning, Access, Care, and Treatment program in the fiscal year 1997-1998, which substantially reduced the unintended pregnancy rate and the number of uninsured pregnant women after 1999 (Foster et al. 2004).

  9. We estimated reduced form models to assess the validity of the instruments. These models were estimated separately for public, NFP, and FP hospitals. Different versions of models were estimated using continuous financial measures and categorical versions of these measures. Overall, we estimated 18 different versions of these models across the 3 ownership categories. All but three indicated that the two-year lagged financial variable was highly correlated to the one-year lagged value in the reduced form model (p < .05). Thus, we judged the two-year lagged financial variables to be generally good instruments for the one-year lagged values.

  10. The states of California, Colorado, and Iowa have more than 20 percentage of missing value on the race variable after 2000 and Washington does not provide race data at all.

  11. The top fifteen DRG codes in our study states are similar across study years. Therefore, we only present the results in 2003.

  12. Results for the full models are available from the lead author upon request.

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Authors and Affiliations

  1. Department of Health Management and Policy, University of North Texas Health Science Center, 3500 Camp Bowie Blvd., Fort Worth, TX, 76107, USA

    Hsueh-Fen Chen

  2. Department of Health Administration, Virginia Commonwealth University, 1008 East Clay Street, P.O. Box 980203, Richmond, VA, 23298-0203, USA

    Gloria J. Bazzoli & Hui-Min Hsieh

Authors
  1. Hsueh-Fen Chen
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  2. Gloria J. Bazzoli
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  3. Hui-Min Hsieh
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Correspondence to Hsueh-Fen Chen.

Additional information

Research for this study was supported by a grant from the National Heart, Lung, and Blood Institute: 5R01HL082707-02.

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Chen, HF., Bazzoli, G.J. & Hsieh, HM. Hospital Financial Conditions and the Provision of Unprofitable Services. Atl Econ J 37, 259–277 (2009). https://doi.org/10.1007/s11293-009-9183-9

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