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INVESTOR-OWNED AND NOT-FOR-PROFIT HOSPITALS: ADDRESSING SOME ISSUES

by Frank A . Sloan an d Rober t A. Vraci u

Prologue: Interest in the comparative economic performance of for-profit hos- pitals and not-for-profit hospitals has intensified in recent years as these institutions have increasingly come to compete for patients, patient care services, and, in some cases, even for physicians. The article that follows strives to shed light on how these hospitals com- pare on selected, but nonetheless important, factors. Frank A. Sloan, a professor of economics at Vanderbilt University and di- rector of the Health Policy Center there, has developed a respected reputation as an economist with impressive analytic talents. Rob- ert A. Vraciu is vice-president for strategic planning and research at Hospital Corporation of America, the largest of the investor- owned hospital management companies. B y comparing informa- tion available on Florida hospitals, Sloan and Vraciu strive to prove that hospitals do not behave differently simply because they are structured on a for-profit or not-for-profit basis. Regardless of the type of ownership, Sloan and Vraciu maintain, hospitals must balance their financial needs with the social responsibilities in which they are invested by society. A particularly striking finding is that the community costs of the for-profit and not-for profit hos- pitals—all of which are nonteaching institutions in this study —are quite similar. Investor-owned system hospitals and not-for profit hospitals are virtually identical in terms of after-tax profit margins, percentages of Medicare and Medicaid patient days, the dollar value of charity care, and bad debt adjustments to revenue. There are some differences in the services offered by the two groups of hospitals, but there is no pattern with regard to "profitable versus nonprofitable services. "

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26 HEALT H AFFAIR S

During th e pas t fifteen years , the hospita l industr y ha s undergon e some dramatic structural an d behaviora l changes . The mos t dra -matic relate s t o th e proliferatio n o f multipl e hospita l systems , both investor-owne d an d not-for-profit . Betwee n 197 0 an d 1980 , ther e was a 20 4 percen t increas e i n th e numbe r o f hospital s involve d i n suc h systems. Currently , ther e ar e 1,89 0 hospital s involve d i n 26 1 suc h sys - tems; an even larger number ar e involved i n some type of sharing arrange- ment with other hospitals. 1

A secon d dramati c chang e relate s t o th e greate r prominenc e give n the "busines s ethic " withi n th e hospita l industry . Change s i n th e envi - ronment hav e create d deman d fo r greate r acces s t o capital , les s reli - ance o n philanthropy , mor e attentio n t o competition , an d a greate r understanding o f profi t margin s i n th e long-ru n financin g o f an y organization. Investor-owne d hospita l group s ar e a foca l poin t o f atten - tion i n thi s regard ; however , not-for-profi t hospitals , bot h free-standin g and member s o f systems , ar e becoming , b y necessity , mor e busines s oriented. Fo r example , th e America n Hospita l Association , a bellwethe r of concern s withi n th e not-for-profi t hospita l sector , offers , professiona l development program s relate d t o organizationa l restructuring , marketing , and "winnin g a t competition. " Term s suc h a s "marke t segmentation " and "profits " are commonplace withi n such programs .

These change s withi n th e hospita l industr y ar e recognize d i n man y ways withi n th e literature. 2 Unfortunately , attentio n i s ofte n focuse d on th e questio n o f "investor-owne d hospital s versu s not-for-profi t hospitals" a s if the for m o f ownershi p i n an d o f itsel f wa s a major deter - minant o f behavior . Th e analyse s tha t accompan y discussio n o f thi s question ofte n rel y o n ver y limite d dat a bases , an d fai l t o separat e ownership fro m othe r variable s suc h a s free-standin g versu s syste m hospitals. Consequently , studie s ofte n rais e mor e question s tha n the y answer. The y leav e intac t severa l issue s whic h ten d t o b e discusse d o n an emotiona l basi s an d caus e unnecessar y divisio n withi n th e hospita l industry.

This study addresse s four o f those issues: Issue 1: Investor-owne d hospital s d o no t trea t Medicare , Medicaid , o r

charity patients . Issue 2: Investor-owne d hospital s onl y offe r thos e service s whic h ar e

profitable. Issue 3: Not-for-profi t hospital s do not earn a profit . Issue 4: Investor-owne d hospital s are more costly. In addressin g thes e issues , comparison s ar e mad e betwee n investor -

The authors thank Mr. David Swenson and Mrs. Lisa Ogletree of The Center for Health Studies, Hospital Corporation of America, for analytic work and assistance in this study.

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ADDRESSING SOM E ISSUES 2 7

owned hospital s tha t ar e part o f systems , tota l investor-owne d hospitals , and not-for-profi t hospitals. 3

Data

Data fo r thi s stud y com e fro m Florida . W e focus o n Florid a fo r sev - eral reasons . First , th e Florid a hospital s ar e require d t o submi t finan - cial dat a annuall y t o the Florida Stat e Hospita l Cos t Containmen t Board . Thus, comparabl e financia l dat a ar e availabl e fo r al l hospital s i n th e state. Dat a o n servic e mi x ar e availabl e fro m th e America n Hospita l Association throug h thei r repor t o n th e 198 1 Annual Survey . A sec - ond reaso n wh y Florida i s a good stat e t o study i s the 33 percent marke t share o f investor-owned communit y hospital s i n this state . This i s a suf- ficiently larg e numbe r t o permi t vali d comparisions . Tabl e 1 present s descriptive statistic s on the three groups of hospitals studied here :

1. Private not-for-profit Religiou s an d secular hospital s tha t hav e bee n granted ta x exemptions b y the Internal Revenu e Service . Thi s ex- cludes government hospitals .

2. Investor-owned systems. Hospitals owne d b y a larg e investor-owne d hospital system, such as Hospital Corporation of America, America n Medical International, and Humana.

3. Total investor-owned. All investor-owned hospitals , bot h thos e par t of systems and free-standing .

Our stud y compares Florida nonfederal, short-ter m general , nonteachin g hospitals unde r 40 0 beds. Th e vast majorit y o f community hospital s i n Florida (and in the country) fall within thes e bed size and teaching statu s categories. B y "nonteaching, " w e mea n th e hospita l ha s n o approve d residency program , i s not affiliate d wit h a medica l school , an d is not a member of the Council of Teaching Hospitals .

Financial Performance

Our analysi s o f financia l performanc e o f investor-owne d an d not - for-profit hospital s focuse d o n thes e tw o questions : (1 ) Whic h typ e i s more costly? , an d (2 ) D o investor-owne d hospital s ear n "reasonable " profits? I n answerin g th e firs t question , w e mus t ensur e tha t "cost " i s measured i n comparabl e ways . T o mak e vali d comparisons , w e mus t measure th e cos t t o the communit y payin g fo r th e resources consume d by th e hospital. 4 Investor-owne d an d not-for-profi t hospital s us e dif - ferent financia l model s du e t o tax-exemp t statu s o f not-for-profi t hospitals. I n particular , paymen t o f taxe s b y investor-owne d hospital s (an offse t t o communit y costs ) an d donation s receive d b y not-for - profit hospital s ( a communit y cost ) requir e adjustment s t o standar d accounting reports . Availabl e dat a d o not permit complet e reconciliatio n

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28 HEALT H AFFAIRS

of thes e differences . Th e followin g tw o definition s describ e th e approx - imations used i n our comparisons of financial performance :

1. Our communit y cos t measur e i s net operating funds, define d a s oper - ating revenues (ne t o f contractual adjustment s an d nonpai d accounts ) minus incom e taxes . Unfortunately , propert y taxe s were no t specifi - cally reported.5 Thus , ta x adjustment s ar e understate d fo r investor - owned hospitals . The rational e fo r reducin g ne t operatin g revenue s by taxes is quite simple . The sam e "community" which pay s for hos - pital service s vi a patien t charge s als o receives "repayment " throug h taxes pai d b y th e hospital . Th e appropriat e cos t t o th e communit y is net payment s for hospita l services since patient charge s by investor - owned hospital s reflec t thi s cos t o f doin g business . Not-for-profi t hospitals do not pay these taxes.

2. Profits ar e measure d b y th e total margin, th e after-ta x differenc e between tota l revenu e an d tota l expense . Thi s calculatio n include s so-called nonoperatin g revenue s fo r bot h investor-owne d an d not - for-profit hospitals . Thi s represent s th e "botto m line " fo r investor - owned hospitals , but understate s th e "botto m line " for not-for-profi t hospitals becaus e o f fun d accountin g rules . Not-for-profi t hospital s are permitted to segregate restricted donations and most income fro m restricted funds , althoug h thes e fund s ar e "pai d b y th e commun - ity" an d cove r th e sam e financia l requirement s tha t operatin g rev - enues in investor-owned hospital s must cover .

The ne t operatin g fun d definitio n make s a necessar y adjustmen t s o that "cost " comparison s ar e vali d eve n thoug h i t i s no t a conventiona l financial account . Financia l accountin g rule s ar e develope d fo r th e purpose o f disclosure , no t fo r th e purpos e o f comparin g on e grou p o f hospitals with another .

Relative Community Costs. Comparison s o f th e relativ e cost s betwee n not-for-profit hospital s an d investor-owne d hospita l system s sho w tha t the tw o groups of hospitals ar e virtually identical . Figure 1 shows the ne t operating fund s an d operatin g expens e pe r adjuste d admission. 6 Th e net operatin g fun d statistic s ar e identica l whil e th e investor-owne d hospital system s sho w a lowe r operatin g expense . Tota l investor-owne d hospitals, whic h includ e free-standin g investor-owne d hospitals , sho w a greater ne t operatin g fun d statistic . Correspondingly , comparison s o n a "per adjuste d patien t da y basis, " show n i n Figur e 2 , ar e quit e similar — less tha n 2 percen t differenc e i n ne t operatin g fund s betwee n not-for - profit an d investor-owne d systems ' hospitals . Lengt h o f sta y fo r thes e groups were 7. 3 and 7. 2 days respectively.

These simpl e comparison s onl y contro l fo r be d size , teaching , owner - ship, an d relativ e mi x o f inpatien t an d outpatien t services . T o adjus t for thes e and othe r potentia l sources of differences i n net operating funds ,

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ADDRESSING SOM E ISSUES 2 9

Figure 1 N e t Operating Funds Per Adjusted A d m i s s i o n , 0-399 B e d s , 1980

Figure 2 N e t Operating Funds P e r Adjusted Patient D a y , 0-399 B e d s , 1 9 8 0

we also performed regressio n analysis. The regressions included indepen - dent variable s fo r ownership , Medicar e an d Medicai d day s as proportion s of total days, bed size , location, county population , an d a n index of "sophis-

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30 HEALT H AFFAIRS

Table 1 Key Characteristics O f T he Florid a Dat a Bas e

Characteristic

Number

0-99 beds 100-199 beds 200-299 beds 300-399 beds Gold Coast* Counties over 100,00 0 pop. Counties under 100,00 0 pop.

Beds (mean number )

Nonprofit

27.0% 28.8 26.9 17.3 36.5 42.3 21.2

186.8

Investor-Owned Total

19.9% 36.7 35.0 8.4

31.7 43.3 25.0

1747

Investor-Owned Systems

17.7% 35.6 40.0

6.7 28.9 48.9 22.2

179.0

*Refers to hospitals in Broward (Fort Lauderdale), Dade (Miami), and Palm Beach counties.

Table 2 Industrial Profi t Margin s

Industrial Grouping

Pharmaceuticals Electric utilities Maritime Telecommunications Computers

Newspapers Railroads Proprietary drugs Toiletries and cosmetics Hospital supplies

Broadcasting

Average Profit Margin 1977-1981

11.34% 11.34 11.18 10.56 10.20

8.80 8.24 7.98 7.68 7.40

7.36 Hotel and gaming companies 7.3 6 Publishing Soft drink s Fast foods

6.48 6.48 6.40

Industrial Grouping

Advertising Recreation Liquor and tobacc o Chemicals Petroleum

Natural gas *Hospital management Electronics Steel Building

Real estate Clothing Retail stores Autos and truck s Grocery stores

Average Profit Margin 1977-1981

6.18% 6.06 5.92 5.84 5.72

5.62 5.30 5.12 4.76 4.14

3.68 3.38 3.06 2.22 0.89

Source: The Value Line Investment Survey (New York: Arnold Bernard & Co. Inc.) V. 36, 1981 and V. 37, 1982

ticated" hospital facilities an d services . Holding th e othe r influence s con - stant, w e found ne t operating funds pe r adjuste d patien t da y to be highe r in th e investor-owne d syste m tha n i n not-for-profi t hospitals . However , on a per adjuste d admissio n basis , there wa s no statisticall y significan t dif - ference betwee n th e tw o type s o f hospitals . Sinc e th e pe r admissio n

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ADDRESSING SOM E ISSUES 3 1

measure take s accoun t o f difference i n length o f stay, it merits far greate r attention.

Based o n thes e comparisons , w e conclude : (1 ) th e ne t operatin g cost t o th e communit y i s virtuall y identica l i n not-for-profi t hospital s and investor-owne d hospita l systems ; an d (2 ) investor-owne d systems ' hospitals are less costly than free-standing investor-owne d hospitals .

Profitability. Th e ter m "not-for-profi t hospital " i s misleadin g i n tha t i t implies suc h hospital s d o no t mak e profits . America n Hospita l Associ - ation data sho w that community not-for-profi t hospitals , as a group, hav e made profit s throughou t th e pas t tw o decades. 7 The lega l distinction be - tween not-for-profi t an d investor-owne d hospital s doe s no t refe r t o th e earning o f profits , bu t rathe r t o limitation s o n th e distributio n o f pro - fits, th e abilit y (o r inability ) t o receive ta x deductibl e donations , an d ta x exemption. Al l organization s no t heavil y subsidize d mus t ear n a profi t if they ar e t o survive . Profit s ar e necessar y fo r maintainin g o r expandin g plant an d equipment , especiall y durin g a perio d o f hig h inflatio n an d rapid technologica l change, and fo r covering the cost of capital.

The tota l margi n (afte r tax ) fo r th e thre e hospita l group s i s pre - sented i n Figur e 3 . Not-for-profi t hospital s sho w a slightl y highe r mar - gin tha n d o bot h investor-owne d system s an d tota l investor-owne d hospitals. Not-for-profi t hospitals ' tota l margi n i s booste d b y 2. 3 per - centage point s ove r th e operatin g margi n (operatin g revenu e minu s operating expense) because of nonoperating revenu e suc h as nonrestricted donations, incom e fro m investments , an d unrestricte d incom e fro m re - stricted funds .

Regression analysis , usin g th e sam e independen t variable s a s above , showed n o statisticall y significan t differenc e betwee n investor-owne d systems, and not-for-profi t hospital s in total margin .

The comparison s i n Figur e 3 sho w th e profitabilit y o f th e thre e hos - pital group s t o b e ver y similar . Profitabilit y canno t b e considere d "excessive" fo r eithe r grou p give n th e averag e profi t margin s o f othe r industries. Tabl e 2 present s th e averag e profi t margi n o f thirt y indus - trial group s fo r th e year s 197 7 throug h 1981 . Hospita l managemen t companies fall in the lower third o f Table 2 .

Cross-Subsidies

A "cross-subsidy " occur s whe n revenue s fro m on e particula r goo d or servic e ar e use d t o cove r th e resourc e cos t o f producin g anothe r good o r service . Som e degre e o f cross-subsidizatio n occur s withi n an y business. Major subsidie s in the hospital industry include :

1. Subsidies betwee n hospita l department s (fo r example , obstetric s loses money, but radiolog y make s money )

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32 HEALT H AFFAIR S

F i g u r e 3 T o t a l M a r g i n Afte r T a x , 198 0

Figure 4 Medicare A n d Medicaid Days A s A P e r c e n t Of Total Acute Patient Days, 1980

2. Graduate medica l educatio n an d medica l research ar e subsidize d b y payments for patien t services .

3. Public hospitals obtain operating and capital subsidies from ta x funds .

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ADDRESSING SOM E ISSUE S 3 3

4. Patients who pay full charge s subsidize Medicare, bad debt , an d char - ity patients.

5. Not-for-profit hospital s ca n borro w freel y a t tax-exemp t rate s an d do no t pa y taxe s o n profit s o r property . Thes e ta x subsidie s d o no t appear a s explicit items in government accounts .

Although w e recogniz e ther e ar e a hos t o f conceptua l an d practica l issues associate d wit h subsidization , fo r th e purpose s o f thi s analysis , we narro w th e focu s t o relativ e difference s i n subsidie s fo r tw o socia l insurance programs , Medicare an d Medicaid , an d nonpayin g patients .

Figure 4 present s Medicar e an d Medicai d day s a s a percen t o f tota l acute patien t day s b y ownershi p type . Ther e ar e n o meaningfu l differ - ences betwee n th e thre e groups . Investor-owne d hospitals , i n total , are slightl y highe r i n th e percentag e o f Medicai d patien t days . Break - downs b y be d siz e an d ownershi p (no t shown ) als o fai l t o revea l note - worthy distinctions .

Contractual allowance s fo r Medicar e an d Medicai d ar e appropri - ately viewe d a s taxes. 8 Thi s follow s sinc e Medicar e an d Medicai d pa y on the basis of "allowable" costs, and becaus e o f their share of the marke t for hospita l care , thes e program s posses s th e marke t powe r t o force hos - pitals t o accep t a substantia l discount . Figur e 5 present s th e effectiv e taxes (contractua l allowance s plu s incom e tax ) fo r th e thre e hospita l groups. These subsidie s ar e highe r fo r investor-owne d tha n not-for-profi t hospitals, an important competitiv e advantag e fo r th e latter .

Nonpaying patient s sho w u p a s eithe r charit y o r ba d deb t adjust - ments t o revenue . O n a pe r patien t da y basis , th e thre e hospita l group s were virtuall y identical . Bot h not-for-profi t hospital s an d tota l investor - owned hospital s offse t revenue s $16 , an d investor-owne d hospita l sys - tems offse t revenue s $1 5 pe r patien t day . Clearly , investor-owne d hospitals an d not-for-profi t hospital s i n Florida , a s a group , trea t indi - gent and nonpayin g patient s to the same degree .

Service Mix

Data ar e unavailabl e fo r comparin g th e mi x o f patient s b y diagnosis . However, availabl e dat a d o permi t th e compariso n o f service s offered . Table 3 compare s availabilit y o f facilitie s an d service s b y ownership . The tabl e include s al l facilitie s an d service s liste d i n Sectio n C o f th e A H A ' s 198 0 A n n u a l Survey . Severa l feature s o f th e tabl e ar e noteworthy. First , outpatien t service s ar e ofte n use d b y person s wit h low income s an d som e hav e voice d concer n tha t investor-owne d hos - pital ar e les s likel y t o provid e suc h care . I n fact , i n Florid a th e investor - owned systems ' hospital s hav e a highe r percentag e o f institution s wit h emergency department s tha n th e not-for-profits , an d th e tota l investor -

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34 HEALT H AFFAIRS

owned grou p i s onl y slightl y lower . Th e investor-owne d hospital s ar e less likel y t o provid e outpatien t psychiatri c care , bu t thi s ma y b e off - set b y greate r availabilit y o f clinica l psycholog y service s i n investor - owned hospitals . Second , th e tw o ownership group s ar e roughly compa - rable i n the area s of radiology, laboratory, an d pharmac y offerings . Third , the not-for-profit s ar e mor e likel y t o offe r suc h "profitable " service s a s open-heart surgery , cardia c catheterization , an d C T scanning , bu t ar e also more likely to offer a n "unprofitable" on e like premature nursery .

Overall, excep t fo r cardia c care , th e comparison s sugges t equalit y between not-for-profi t an d investor-owne d systems ' hospitals , bot h i n terms o f servic e sophisticatio n an d willingnes s t o offe r unprofitabl e services. Free-standin g investor-owne d hospital s offe r a mor e limite d set of facilities an d service s than d o either o f the other tw o groups. Thes e data sugges t tha t hospital s structur e themselve s similarly , regardles s o f ownership.

Summary

The precedin g analyse s sho w a clea r patter n o f similaritie s betwee n nonteaching, not-for-profit , an d investor-owne d hospital s i n Florida . Our comparison s o f relativ e communit y cost s o f th e tw o type s o f insti - tutions revea l n o rea l differences . Investor-owne d syste m hospital s an d not-for-profit hospital s ar e virtuall y identica l i n term s o f after-ta x profi t margins, percentage s o f Medicar e an d Medicai d patien t days , an d th e dollar valu e o f charit y car e an d ba d deb t adjustment s t o revenue . There ar e som e difference s i n th e service s offere d b y th e tw o group s of hospitals , bu t ther e i s n o patter n wit h regar d t o "profitabl e versu s nonprofitable" services . Thus , ou r finding s clearl y sho w tha t owner - ship (investor-owne d versu s not-for-profit ) i s a poo r predicto r o f a hos - pital's willingnes s t o trea t low-incom e patients , cost s t o th e community , and profitability .

Our stud y i s base d upo n dat a fro m Florid a whic h raise s question s regarding generalizin g o f results . A s note d above , Florid a provide s a good cas e stud y fo r a n in-dept h analysis ; on e reaso n i s tha t th e dat a permit som e comparison s no t possibl e o n a nationa l basis . Nevertheless , our result s o n costs , profits , an d Medicai d patien t shar e reinforc e thos e of a recen t nationa l study. 9 Thus , ther e i s no reaso n t o believ e tha t th e findings i n this study are unique t o Florida.

This issu e o f generalizin g notwithstanding , ou r result s shoul d la y t o rest th e myth s surroundin g differentia l behavio r o f hospital s base d solely o n th e ownershi p o f thos e hospitals . Hospitals , regardles s o f ownership, ar e specia l type s o f institutions . The y ar e bot h socia l an d economic institutions . A s such , the y ar e aske d t o balanc e som e clea r financial consideration s wit h som e les s clearl y define d socia l objectives .

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ADDRESSING SOM E ISSUE S 3 5

Table 3 Facilities A n d Services (Percentage Of Hospitals With)

Postoperative recovery room Pharmacy with registered pharmacist (full-time ) Pharmacy with registered pharmacist (part-time ) Histopathology laborator y Electroencephalography

Respiratory therapy services Physical therapy services Occupational therapy services Dental services Podiatric services

Speech pathology services Volunteer services department Patient representative services Social work services Hospital auxiliary

Premature nursery Abortion services (inpatient) Abortion services (outpatient) Hospice Emergency departmen t

Organized outpatient departmen t Rehabilitation outpatient service s Organ bank Blood bank Genetic counseling services

Open-heart surgery facilitie s Alcoholism chemical dependency outpatient services Psychiatric services

Emergency Outpatient Partial hospitalization Foster and/or home care Consultation an d educatio n

Clinical psychology services Radiation therap y

X Ray Megavoltage

Radioactive implants Radioisotope facilitie s

Diagnostic Therapeutic

Family planning services Home care department CT scanners Cardiac catheterization

Investor- O w n e d

Nonprofit Total 90.2% 84.2

7.8 76.5 86.3

92.5 90.2 23.1 56.8 45.1

39.2 58.8 56.9 86.3 78.4

29.4 31.4 11.8 2.0

72.5

43.1 17.6 0.0

60.8 0.0

13.7 7.8

21.6 9.8 9.8 0.0

23.5

9.8

13.7 11.8 27.5

80.3 19.6 2.0 7.8

39.2 15.7

83.1% 83.0

1.7 72.9 79.7

83.1 83.0 30.5 33.9 44.1

40.7 61.0 44.1 76.3 37.6

5.1 32.2 16.9 3.4

71.2

32.2 11.9 1.7

69.4 0.0

6.8 3.4

11.9 5.1 1.7 0.0

13.6

10.2

11.9 5.1

15.3

76.3 13.6 0.0 3.4

27.1 6.8

Investor- O w n e d Systems

88.9% 88.9

2.2 77.8 86.7

88.9 91.1 31.1 40.0 53.3

40.0 64.4 51.1 82.2 64.4

6.7 33.3 20.0 4.4

80.0

40.0 15.6 2.2

73.3 0.0

8.9 4.4

15.6 6.7 0.0 0.0

15.6

13.3

15.6 6.7

17.8

60.0 13.3 0.0 2.2

24.4 8.9

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36 HEALT H AFFAIR S

Figure 5 Effective Taxes P e r Adjusted Patient Day, 0-399 Beds, 1 9 8 0

The forme r includ e staying i n busines s an d coverin g th e cos t o f capital , both deb t an d equit y capita l Social responsibilitie s o f hospital s ap - pear t o include:

1. Providing som e care for nonpayin g patient s 2. Providing some historically unprofitabl e medica l service s 3. Providing a facility fo r graduat e medica l education an d researc h Hospitals, regardles s o f ownership , hav e t o balanc e th e financia l

and socia l imperative s o f thei r businesses . A s w e hav e argue d here , the conventiona l behaviora l distinction s betwee n investor-owne d an d not-for-profit hospital s ar e no t relevan t i n term s o f scop e o f services , treatment o f nonpayin g patients , an d economi c performance . I t i s tim e to pu t behin d u s th e emotiona l debat e surroundin g suc h behaviora l distinctions an d mov e o n t o th e mor e pressin g issue s facin g th e healt h care system in general.

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ADDRESSING SOM E ISSUES 3 7

N O T E S

1. American Hospita l Association , Cente r fo r Multi-Institutiona l Arrangements . 2. E. R . Becke r an d Fran k Sloan , "Hospita l Ownershi p an d Performance, " mimeographe d

(1982); M. Brown e t al. , "Trends i n Multihospita l Systems : A Multiyea r Comparison, " Health Care Management Review 1 5 (Fall 1980) : 9-22; Lawrenc e S . Lewi n e t al. , "Investor-Owned s and Nonprofit s Diffe r i n Economi c Performance, " Hospitals 5 5 (Jul y 1 , 1981) : 52-8 ; C M . Lindsay, "Th e Theor y o f Government Enterprise, " Journal of Political Economy 8 4 (Octobe r 1976): 1061-77 ; and Fran k Sloa n an d B . Steinwald, Insurance, Regulation, and Hospital Costs (Lexington, Mass. : D. C. Heat h 1980) .

3. T he sampl e siz e of not-for-profi t hospital s wh o ar e member s o f multipl e hospita l system s is too small in Florida t o segment fro m free-standin g hospitals .

4. When w e refe r t o "community, " w e refe r t o th e grou p o f peopl e wh o pa y patien t charges , insurance premiums , taxes , a n d / o r contribut e donation s whic h financ e th e operatio n o f a hospital. Dependin g u p o n a host o f factors , includin g th e ne t in-flo w an d out-flo w o f local , state, an d federa l taxes , thi s "community " ma y no t directl y correspon d t o a hospital's serv - ice population .

5. Gross charge s ar e inappropriat e fo r measurin g th e "cost " o f hospita l services . Becaus e o f the multipl e contractua l adjustments , ba d debts , an d othe r reasons , fe w peopl e actuall y pay "billed " charges . Failin g i n som e wa y t o accoun t fo r thes e differen t price s b y averagin g the cost , clearly distort s th e analysis .

6. Admissions an d patien t day s ar e bot h adjuste d i n conventiona l way s t o eliminat e differ - ences in inpatient versu s outpatient revenue s acros s hospitals .

7. See F . A. Sloan , "Regulator y Strategie s fo r Hospita l Cos t Control : Evidenc e fro m th e Las t Decade," mimeographed ( 1982); submitted fo r publication .

8. Hugh W . Lon g an d J . B . Silvers, "Healt h Car e Reimbursemen t i s Federal Taxatio n o f Tax - Exempt Providers" , Health Care Management Revie w 1 , no. 1 , Winter 1976 .

9. Becker an d Sloan , "Hospita l Ownershi p an d Performance. "

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