Market Forces

HMO market penetration does not account for poorer financial performance of public compared with private hospitals

Public hospitals, which typically provide a medical safety net for the poor and medically indigent, had lower operating margins, similar revenues, and higher expenses compared with private hospitals in 1995. Nevertheless, this poorer performance could not be traced to HMO market penetration, concludes a study by Jan P. Clement, Ph.D., of Virginia Commonwealth University, and Kyle L. Grazier, Dr.P.H., of the University of Michigan. The study was supported in part by the Agency for Healthcare Research and Quality (HS09217).

The researchers examined the interaction of hospital-specific measures (for example, bed occupancy and type of ownership) and market-specific measures (ranging from hospital competition to physicians per 1,000 population) with ownership in a study of over 2,300 hospitals in 321 metropolitan areas in 1995 to examine the impact of HMO market penetration on hospital financial performance. Although all hospitals located in markets with higher HMO penetration had lower revenues and expenses than hospitals located in markets with lower HMO penetration, the financial performance of public hospitals was not any more or less influenced by HMO penetration, even though public hospitals were weaker financially.

However, public hospitals in high-minority markets had both higher expenses and lower revenues per case than other hospitals. The effect of a market with a higher proportion of aged members was negative for all hospitals but more so for public hospitals. In contrast, markets with more for-profit competitors contributed to better financial performance by public hospitals, perhaps because managers of public hospitals adopted some of their competitors' practices in such markets, explain the researchers. They conclude that, in spite of managed care, reimbursement policies and management actions can alleviate the financial vulnerability of public hospitals and allow them to maintain their traditional roles in caring for the poor.

More details are in "HMO penetration: Has it hurt public hospitals?" by Drs. Clement and Grazier, in the fall 2001 Journal of Health Care Finance 28(1), pp. 25-38.

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