Efficiency and profitability in US not-for-profit hospitals
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Efficiency and profitability in US not‑for‑profit hospitals Michael Rosko1 · Mona Al‑Amin2 · Manouchehr Tavakoli3 Received: 16 May 2019 / Accepted: 7 August 2020 © Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract This article examines the relationship between hospital profitability and efficiency. A cross-section of 1317 U.S. metropolitan, acute care, not-for-profit hospitals for the year 2015 was employed. We use a frontier method, stochastic frontier analysis, to estimate hospital efficiency. Total margin and operating margin were used as profit variables in OLS regressions that were corrected for heteroskedacity. In addition to estimated efficiency, control variables for internal and external correlates of profitability were included in the regression models. We found that more efficient hospitals were also more profitable. The results show a positive relationship between profitability and size, concentration of output, occupancy rate and membership in a multi-hospital system. An inverse relationship was found between profits and academic medical centers, average length of stay, location in a Medicaid expansion state, Medicaid and Medicare share of admissions, and unemployment rate. The results of a Hausman test indicates that efficiency is exogenous in the profit equations. The findings suggest that not-for-profit hospitals will be responsive to incentives for increasing efficiency and use market power to increase surplus to pursue their objectives. Keywords Hospitals · Profits · Stochastic frontier analysis · Payment policy JEL Classification I1 · I11
Introduction In this article we examine the relationship between efficiency and hospital profits. Jacobs et al. (2006, p. 1) state that “The pursuit of efficiency has become a central objective of policy makers within most healthcare systems”. Rosko and Mutter (2011) point out that while costs can be reduced by socially undesirable ways such as reducing quality or reducing quantity of services (which reduces access), improvements in efficiency allow * Michael Rosko [email protected] 1
Graduate Program in Health Care Management, School of Business Administration, Widener University, One University Place, Chester, PA 19013, USA
2
Department of Healthcare Administration, Sawyer Business School, Suffolk University, 120 Tremont Street, Room 5603, Boston, MA 02108, USA
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School of Management, University of St. Andrews, St. Andrews KY16 9RJ, Scotland, UK
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an increase in quality or quantity of services for the same outlay. However, increasing efficiency allows a reduction of costs without affecting quality or access and the attention to efficiency in the literature has been substantial. For example, Hussey et al. (2009) reported that over 5550 titles related to healthcare efficiency were published between 1990 and 2005. The Institute of Medicine included efficiency as one of six aims for the twenty-first century health system in its report Crossing the Quality Chasm (2001). As a result
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