Investor owned health care organizations have the following equity section accounts:

1.Private not-for-profit health care organizations follow standards set by:A) GASB.B) FASB.C) SEC.D) All of the above.Answer:B

2.Health care organizations that are privately owned and operated to provide a return toinvestors follow which standards:C

3.The AICPAAudit and Accounting Guide: Health Care Organizationsapplies to:D

4.The AICPAAudit and Accounting Guide: Health Care Organizationsprovidesreporting requirements for all of the following organizationsexcept:

5.The AICPAAudit and Accounting Guide: Health Care Organizationsapplies to:A)Private sector, not-for-profit hospitals.B)Public sector, government-owned hospitals.C)Both (a) and (b) above.D)Neither (a) nor (b) above.Answer: C

6.The equity section of the Statement of Net Position of a government-owned hospitalmay contain which of the following descriptions?

7.The equity section of the Statement of Net Assets of a private not-for-profit hospitalmay contain which of the following descriptions?

8.Which of the following isnotcorrect with respect to reporting of patient servicerevenue for health care organizations?C

Dan Ermann and Jon Gabel

The new medical-industrial complex is the most important recent development in American health care and it is in urgent need of study.

—Arnold S. Relman1

Introduction

In 1983, one of every seven U.S. hospitals with nearly 10 percent of the nation's hospital beds belonged to an investor-owned multi-hospital system, defined as three or more hospitals that are owned, managed, or leased by a single investor-owned organization.2 Such systems account for approximately 42 percent of U. S. hospitals that belong to a multihospital system. Religious systems account for 35 percent with the remainder being voluntary and city hospital systems.3

In September 1984, there were 53 investor-owned systems operating. These range from the very small, such as Western Hospital Corporation, Inc., an Alameda, California chain that owns two hospitals and manages one other, to the very large. The four largest—Hospital Corporation of America (HCA), Humana, Inc., National Medical Enterprises, Inc. (NME), and American Medical International, Inc. (AMI)—own or manage 53 percent of investor-owned system hospitals and 75 percent of the hospital beds.4 Some experts predict that within a few years, the four to five largest investor-owned systems will control over half the nation's hospitals.5

This paper examines investor-owned systems' growth patterns, the reasons why they have grown rapidly, and their effects on cost, access, and quality of care. To address these issues, this paper synthesizes more than 300 articles from the trade and academic literature through 1984, including 22 empirical studies. The next section describes the growth of investor-owned systems. The third section reviews the reasons for their growth. The fourth section presents findings about the effects of systems on the cost, quality, and access to care. We conclude with a summary of empirical findings and outline an agenda for future research.

Growth of Investor-Owned Systems

At the time of the enactment of Medicare and Medicaid legislation in 1965, there were no investor-owned hospital systems in the United States.6 By 1970, 29 investor-owned systems had been formed which owned 207 hospitals.7 The Federation of American Hospitals (FAH), the trade association representing independent and system investor-owned hospitals, reports that 1,234 hospitals were owned or managed by 53 investor-owned systems in 1984.8

Based on data from the FAH, Table I displays the annual growth of investor-owned system hospitals between 1977 and 1984. These figures include psychiatric and specialty hospitals, as well as community hospitals which grew at a considerably slower rate than psychiatric hospitals. For-profit independent hospitals managed by investor-owned systems are excluded. From 1977 to 1983 the number of hospitals owned by investor-owned systems increased at an average annual rate of 10.3 percent while the number of hospitals managed by such systems grew at a rate of 7.9 percent. By comparison, between 1977 and 1983, the number of independent investor-owned hospitals declined at an average annual rate of 7.0 percent per year,9 while the total number of nonfederal hospitals declined at an average rate of 0.5 percent per year.10

TABLE 1

Growth of Investor-Owned System Hospitals, 1977-1984.

Table 2 shows that the average annual growth in hospital beds for investor-owned system hospitals between 1977 and 1983 was 7.6 percent. Newly built or acquired hospitals tended to be smaller hospitals, whereas managed hospitals tended to be larger, often public hospitals. In contrast, independent investor-owned hospital beds declined at an annual rate of 7.3 percent,11 while the total number of nonfederal hospital beds declined by 0.5 percent per annum during these years.12

TABLE 2

Growth of Investor-Owned Hospital Industry by Beds, 1977-1984 (in thousands).

These tables indicate that in 1984, the first year under Medicare's diagnosis-related group (DRG) payment for hospitals, the rate of growth for investor-owned systems was substantially greater than during the preceding years. In 1984 the number of investor-owned system hospitals increased by 14.0 percent, and the number of hospital beds increased by 12.5 percent. American Hospital Association (AHA) data for 1984 are not available presently. Therefore, it is not possible to compare investor-owned growth with other segments of the hospital industry.

Investor-owned systems have grown largely through the acquisition of financially troubled hospitals. Urban hospitals which have closed due to financial difficulties tend to be small nonprofit, inner city, voluntary hospitals serving many minority, uninsured, and Medicaid patients.13 These, for the most part, are not the hospitals that investor-owned systems wish to acquire. Investor-owned systems generally seek to acquire poorly managed hospitals in communities with young, growing, well-insured populations. From 1980 to 1982, 43 percent of the growth in hospital beds of the six largest investor-owned systems resulted from the acquisition of other investor-owned hospitals. Newly constructed hospitals accounted for a third of the growth, with the remaining 24 percent emanating from the acquisition of government and nonprofit voluntary hospitals.14 Investor-owned systems have located in high-income and high-population-growth, suburban Sunbelt areas with favorable regulatory environments and generous charge-pay-ing Blue Cross plans.15 Fifty-eight percent of the investor-owned system hospitals are found in five Sunbelt States—California, Texas, Florida, Tennessee, and Georgia. There are, in total, only nine investor-owned system hospitals in the four mandatory rate-setting states—Maryland, Massachusetts, New Jersey, and New York.16

Some analysts have interpreted the growth of investor-owned systems as evidence of a movement toward a vertically integrated health delivery system. Unfortunately, there are little historical data documenting the growth of nonhospital portfolios of investor-owned systems. The single exception is the annual survey of freestanding nursing homes and psychiatric hospitals by Modern Healthcare, a trade journal. Modern Healthcare figures indicate that from 1978 to 1983 investor-owned systems acquired and built nursing homes and psychiatric hospitals at a far more rapid rate than they acquired community hospitals. The growth rate for nursing homes exceeded 50 percent per year, while investor-owned systems increased their ownership of psychiatric hospitals at greater than 30 percent per year.17

In addition to psychiatric hospitals and nursing homes, investor-owned systems have entered such diverse health fields as alcohol and chemical dependency treatment, home health services, health maintenance organizations, preferred provider organizations, as well as ownership and management of hospitals in more than 20 foreign nations. In 1983, 6 percent of hospitals managed or owned by investor-owned systems were located in foreign nations.18 These systems also operate nonhealth-related lines of business such as office building management, insurance company management, and real estate development.

Most investor-owned systems appear committed to diversification. For example, HCA, which doesn't consider itself highly diversified, runs more psychiatric facilities than any other U.S. hospital system. HCA owns 18 percent of Beverly Enterprises, the nation's largest nursing home chain, and operates the world's largest health maintenance organization (HMO) in Brazil.19 In 1983, NME, a system known for its diversified business, operated 27 physician office buildings, 25 psychiatric hospitals, 249 long-term-care facilities, 13 home health care agencies, and a biomedical engineering and repair business. Forty-nine percent of NME's total revenues in 1983 were not from acute care hospital operations.20

Even more remarkable than the growth of investor-owned systems has been their financial performance. For 8 of the 10 years between 1971 and 1980, system net profits as a percentage of common equity increased. In 1980, net profits as a percentage of equity were 20.4 percent for the investor-owned systems, in contrast to an average of 14.9 percent for all industries.21 Between 1975 and 1981, net revenues of the four major hospital companies grew at a compound rate of 36 percent, while earnings grew at a 46 percent growth rate.22 America experienced its deepest recession since the Great Depression in 1982; yet, earnings grew 20 percent in the investor-owned hospital industry. In 1983, the industry's average return on equity of 18 percent far exceeded the average of 12.6 percent for other industries.23 The average compensation for the chief executive officers in 1983 of the four leading systems was $854,000. When stock options are included, this figure triples.24

Why Investor-Owned Multihospital Systems Grow

There are three potential advantages of investor-owned systems over independent hospitals: (1) economic benefits, including improved access to capital, increased efficiency and economies of scale, and ability to diversify; (2) personnel and management benefits, such as improved recruiting and ability to develop and retain high-caliber staff; and (3) planning, program, and organizational benefits, which may lead to greater power to control environmental factors.25

Much of the literature does not distinguish between investor-owned and nonprofit systems in terms of their technical advantages. This section attempts to focus on advantages of investor-owned systems, although the literature does not always allow for this. Therefore, some of the discussion pertains to both nonprofit and investor-owned systems.

Economic Benefits

Increasing financial pressure upon hospitals to remain solvent has stimulated the growth of multihospital systems.26 In addition, some experts believe that an oversupply and maldistribution of hospital services has fostered the growth of systems.27

Access to Capital

Hospitals require large sums of capital to replace, renovate, modernize, and expand. Estimates of their capital needs for the decade of the 1980s range from $49 billion to $231 billion.28 With the reduction in private philanthropy and government grants-in-aid, such as the Hill-Burton Program, hospitals have turned increasingly to commercial borrowing to finance capital projects. In 1968, hospitals received, on average, 45 percent of their capital from philanthropy and government grants, and only 40 percent from debt. By 1981, hospitals received 8 percent from philanthropy and grants and 76 percent from debt capital.29

This growing dependency on debt capital between 1968 and 1981 is attributable to a number of factors. First, by covering patients that were previously uninsured, Medicare and Medicaid reduced the hospital's dependency on philanthropy. Second, Medicare and Medicaid provided stability in funding. This made the hospital a sounder credit risk and made hospital debt financing more accessible and attractive. Third, increased use of cost-based reimbursement by Medicare, Medicaid, and Blue Cross reduced the hospital's incentive to control expenditures or finance capital in the least expensive manner, thereby further fostering debt financing. Fourth, the cost of debt capital was additionally reduced when revenue bonds were accorded tax-exempt status. This form of financing was used primarily by nonprofit hospitals.30 Investor-owned hospitals can now only hold up to $40 million in tax-exempt bonds per corporation, virtually precluding their use by major investor-owned systems.31

The financial community provides more favorable borrowing conditions to systems than to independent hospitals. Systems (both tax-exempt and investor-owned) are perceived as sounder risks because of their larger revenue, asset and equity bases, and debt capacity.32 This is further enhanced by increased recognition of systems in the capital markets. Systems are better able to time debt acquisitions to swings in the market, and to spread the risk of borrowing. They also face fewer constraints on growth than independent hospitals. Systems can more easily absorb new operating units without violating the terms of existing lending agreements, and without precipitously increasing the amount of financial leverage.33 Investor-owned systems may, in addition, raise capital through the issuance of stock. In the bond market, $1 of hospital equity may raise $2, while in the equity (stock) market, $1 may raise $15 or $20. Investor-owned hospitals can choose between debt and equity approaches, depending on such factors as interest rates and stock prices,34 giving them the option of using the leverage of their stocks to help finance capital projects.35

The types of debt financing generally used by investor-owned systems include taxable bonds, bank lines of credit, commercial paper, and convertible subordinated debentures drawing on both the domestic and foreign capital markets. The larger pool of outside investors available to investor-owned systems has been instrumental in their growth. Shareholders' equity in the largest four investor-owned multihospital systems nearly quadrupled from 1977 to 1981, from an aggregate of $461 million to $1.832 billion.36

There are a limited number of data-based studies that compare borrowing conditions for system and independent hospitals. These studies are based on national data sets, and in general, strongly support the proposition that systems operate at an advantage in the financial markets. Kidder, Peabody and Company reported that 61 percent of systems (investor-owned and nonprofit) debt borrowings between 1978 and 1981 were rated A+ or AA, whereas only 18 percent of independent hospitals were so rated (Table 3).37 Bonds with full corporate pledges are rated considerably better than system issues with limited corporate pledges.38 Hernandez and Howie reported that investor-owned systems have gained access to public capital markets that were previously denied to investor-owned independent hospitals.39

TABLE 3

Hospital Borrowers by Rating, 1978-1981 (percentage).

Investor-owned hospitals (both system and independent) have been able to raise more capital funds through operating margin, or profits, than nonprofit hospitals. This is due, in large part, to the return-on-equity payment that Medicare and some other third-party payers have provided to for-profit hospitals only. This feature is being reviewed in light of the Medicare prospective payment system with indications that return-on-equity payments may be eliminated in the near future.40

While there appears to be a consensus that systems enjoy an advantage in access to capital, no research has documented the extent that improved access translates into reduced cost of capital. Investor-owned systems' higher bond ratings may merely offset the tax advantages of the nonprofit hospitals. Investor-owned systems may have lower unit costs of capital, but purchase greater quantities of capital, and thereby drive up operating costs.

Increased Efficiency and Economies Of Scale

The literature suggests that multihospital systems should realize certain economies of scale. These potential economies have been attributed to several factors. First, by securing discounts and obtaining superior price information, systems may realize savings through mass purchasing. Second, systems are believed to use capital facilities and equipment more efficiently than independent hospitals through sharing and specialization, in addition to central warehousing of inventories.41 Third, systems are thought to use highly skilled personnel more efficiently than independent hospitals.42 For example, five system hospitals may share the service of one reimbursement specialist at lower unit costs than if that specialist were employed by a single independent hospital.43 Lastly, investor-owned systems are better able to control construction costs. Systems, because of their high use of construction firms, for example, may establish (less costly) ongoing relationships with design and construction concerns. They also use the same or modified designs and blueprints numerous times—further contributing to lower costs.44 There is no research to support or refute these hypothesized efficiencies.

Empirical studies have focused on hospital-wide measures of efficiency, rather than economies associated with the aforementioned factors. Measures of efficiency include length of stay, admissions per bed, occupancy rate, and full-time equivalent staff per patient day. Between 1971 and 1984, nine studies examined efficiency in investor-owned system hospitals.45 The only consensus appears to be that investor-owned system hospitals use fewer staff per bed than other system and nonsystem hospitals.

System Diversification

In an earlier section it was noted that systems were committed to the ownership and management of nonhospital enterprises. Diversification is believed to provide systems with a number of technical advantages over independent hospitals.46 First, profits from health and nonhealth lines of business provide a source of internal funds for financing new capital acquisitions. Second, diversification into non-hospital markets provides additional financial stability. Separate lines of business offer the potential of offsetting cash flow supply during the trough of the hospital's business cycle.47 A recent General Accounting Office study suggests another possible advantage of diversification. System hospitals may purchase goods or services from affiliated entities or subsidiaries at inflated charges, thus increasing their revenues from cost-based insurers.48 This may be contrary to reimbursement rules.

Fourth, diversification is a strategy for growth. Systems are increasingly entering nonhospital lines of business such as HMOs, preferred provider organizations, home health services, nursing homes, emergency centers, and surgery centers in order to increase revenues, control patient movement into and out of hospitals, and facilitate local market growth.49 Management contracting, where one organization assumes responsibility for the management of another hospital or department, illustrates this point. In the short run, management contracting offers increased revenues and the opportunity to spread fixed costs over more units.50 In the long run, management contracting may pave the way for future acquisition of the managed hospital.51 In 1983, investor-owned systems managed 56 percent of the nation's contract-managed hospitals.52

The literature is rich with case studies and anecdotes describing diversification efforts of individual systems.53 Absent from the literature are empirical studies of ''economies of scope," i.e., whether the production of other products lowers unit costs for hospital services.

Personnel Management

There is general agreement in the hospital trade and management literature that investor-owned and nonprofit systems attract and retain better trained management personnel than independent hospitals.54 Attracting welltrained professionals is a serious problem for many rural hospitals. Empirical studies indicate that systems are better able to attract quality medical and administrative personnel in rural areas than independent hospitals.55 There is insufficient empirical evidence to support or refute whether systems have an advantage in personnel management in urban areas.56 Systems may, however, bring about a number of problems: medical staff objections to perceived corporate indifference, impersonal corporate attitudes toward employees and/ or patients, replacement of older loyal employees with corporate personnel, and loss of local autonomy.57

Planning and Organizational Benefits

Hospitals in underserved areas may benefit from improved linkages with other hospitals.58 It is argued that investor-owned systems have the needed resources to maintain hospitals where none would have survived otherwise. It is also argued that systems have the resources to offer ambulatory services and primary care health centers, and, therefore, increase patient access to care.59 They may, in addition, be able to experiment with new programs and services by trying them out selectively at different hospitals within the system before diffusing them to other hospitals as appropriate. In turn, system economic power can be converted into political power and used to influence local planning and state regulatory agencies, thereby enhancing the ability of systems to meet their goals.60 Critics contend that there is a loss of local autonomy under systems, and that systems may not use their economic and political power in the public interest.61 There are no data-based studies to support or refute these contentions.

Why Investor-Owned Systems Grow: A Summary

The literature suggests a number of advantages that investor-owned systems might have over independent hospitals including economies of scale, improved access to capital, greater diversification, personnel, management advantages, and organizational benefits. Although there are few empirical studies to support or refute these claims, it appears that the principal advantage of systems is their favored status in the capital markets. Empirical studies indicate few differences in efficiency between system and independent hospitals, except that investor-owned systems appear to operate with fewer personnel per bed.

Investor-Owned Systems and the Cost of Hospital Care

Twelve empirical studies (see Table 4) have examined the effect of investor-owned systems on the cost of care.74 Each of these studies compares investor-owned system hospitals with a comparison group, usually nonprofit independent hospitals. Because our objective was to examine the impact of investor-owned systems, we have excluded studies that pool independent and system investor-owned hospitals, and studies that pool nonprofit systems with investor-owned systems. These exclusions reduced the number of relevant studies by almost one-half.

TABLE 4

Empirical Studies on the Effect of Investor-Owned Systems on the Cost of Care.

Seven of these 12 studies indicate that investor-owned systems increase the cost of care. Three studies show that costs are lower for system hospitals, and two studies indicate no difference. System hospitals appear to be more costly whether costs are measured as hospital expenses, revenues or charges, or on a per admission or per diem basis.

If investor-owned systems have some technical advantages over independent hospitals, particularly superior access to capital, how do they raise the cost of care? First, investor-owned systems provide more ancillary services.75 Second, markups, the difference between hospital charges or revenues and hospital expenses, are greater, particularly for ancillary services.76 Third, investor-owned system hospitals tend to be newer, thereby increasing capital costs.77

The conclusion that systems raise the cost of hospital care should be tempered by three considerations. First, existing research is based on the experience of the late 1960s through the early 1980s, a period when cost-reimbursement was the predominant reimbursement mechanism. Study findings may indicate how systems and independent hospitals responded to the existing incentive structure. With the federal government's adoption of diagnosis-related group (DRG) payment for Medicare patients, hospitals are entering an era of prospective payment. Systems and independent nonprofit hospitals may behave in a radically different manner when they are rewarded rather than penalized for providing services at lower costs.

Second, when researchers fail to control for self-selection bias, study findings may be suspect. Systems expand by purchasing financially troubled independent hospitals. Cost differences between recently acquired system hospitals and independent hospitals may result from acquisition strategies of systems rather than from differences in the efficiency of system or independent hospitals. However, costs in system hospitals appear to rise quite rapidly in the first few years following a merger, a phenomenon inconsistent with the theory that higher system costs can be attributed to their former owners.

Third, previous studies have focused on costs for an individual hospital. With the exception of a few case studies,78 the more global question, "What happens to area per capita medical care costs, as well as hospital costs, when an investor-owned system enters the market?" has not been addressed. One school of thought holds that investor-owned systems compete by limiting their clientele to the most profitable cases, so-called "cream-skimming." Nonprofit hospitals, which previously used the revenue from these cases to subsidize less profitable cases as well as certain community services (care of the indigent, teaching, and research) may respond to the entry of the investor-owned hospital by increasing prices for unprofitable cases, such as the severely ill, and reducing community services.79 An opposing scenario views investor-owned hospitals as forcing efficiencies on other area hospitals. Community services that are no longer financed through patient cross-subsidies must be identified and supported directly, and this increases public awareness and improves social welfare.80

A case study by Lewin and Associates, Inc. suggests a third scenario—a market characterized by intense nonprice competition.81 Investor-owned system hospitals were constructed in two market areas previously served by one nonprofit hospital each. Both nonprofit hospitals responded to the entry of a system hospital by expanding services, renovating the hospital plant, constructing adjacent physician offices, and improving patient and physician relationships. The result was increased unit charges and expenses, markups, admissions, and hospital per capita expenditures.

Quality and Access

Seven empirical studies have evaluated the effects of investor-owned systems on access, service availability, or quality.82 Table 5 displays study findings.

TABLE 5

Empirical Studies on the Effect of Multihospital Systems on Quality of Care and Access.

Each of these studies potentially suffers from self-selection bias. Systems do not randomly choose where to locate, but self-select into favorable market areas. For example, investor-owned systems tend to locate in fast-growing, less regulated Sunbelt states and areas with lower Medicaid and indigent patient loads. Systems also purchase or build hospitals with certain services and size, generally avoiding large tertiary care hospitals with heavy research and teaching commitments. Studies which compare an experimental group (system hospitals) with a matched control group (independent hospitals) may find no differences simply because the matching process eliminated comparison of hospitals providing different services or teaching programs.

Measures of Access

Seven studies compared investor-owned system hospitals with independent nonprofit hospitals. Measures of access included percentage of revenues from Medicare and Medicaid, availability of specific services, diagnostic case mix, and volume of charity care. Investor-owned system and independent hospitals treated equal percentages of Medicare as well as Medicaid patients.86 Less research is reported on indigent or charity care. Two studies report no difference and one study reports that investor-owned systems provide less uncompensated care (charity, care plus bad debt) than nonprofit control hospitals.87

There is anecdotal evidence of investor-owned hospitals providing less charity care than neighboring nonprofit facilities.88 One difficulty in supporting these anecdotes is that ongoing data systems record who is admitted to a hospital, but not who is turned away or deterred from a hospital.

Service mix was studied using a number of proxy measures, including service profitability, and scope of services offered. No significant differences were found between system and independent hospitals.89

The last measure of access to care tested was hospital case mix. Based on limited analysis of diagnostic case mix, no significant differences were found between investor-owned system and other hospitals.90

Measures of Quality

Four studies compared the quality of care in investor-owned system hospitals with matched independent nonprofit hospitals. Researchers have focused on structural and pro cess measures of quality including staff physician qualifications, hospital accreditation, and educational and residency programs. No significant differences were found in staff qualifications (such as board certification), hospital accreditation, or gross mortality rates.91 System hospitals performed no research activities and participated in fewer teaching and residency programs. However, the matched independent hospitals' commitment to research or teaching programs was also very limited.92

Conclusion

This paper has addressed three questions: (1) What has been the extent and nature of the growth of investor-owned multihospital systems? (2) Why do they grow? (3) What are the effects of these systems on cost, quality, and access to care?

Investor-owned systems are growing in terms of hospitals and hospital beds at the rate of 10 percent a year. This growth has been achieved largely through the acquisition of independent investor-owned hospitals. Investor-owned systems are constructing and acquiring freestanding nursing homes and psychiatric hospitals at a rate more than three times that for community hospitals. The financial performance of investor-owned systems has been impressive. A dollar invested in an investor-owned system has returned nearly 40 percent more in earnings than the average for other industries in recent years.

The literature offers a number of reasons why investor-owned systems grow. The primary reasons are: economic benefits; personnel and management advantages; and planning, program, and organizational benefits. Claimed economic benefits were foremost in the literature and included increased efficiency, economies of scale, improved access to capital, and the ability to diversify. Empirical studies showed little difference between independent and investor-owned system hospitals in efficiency, with the exception that the investor-owned system hospitals use fewer personnel per bed. The major advantage of systems is their ability to finance capital purchases. Empirical evidence indicates strong preference for systems by the capital markets. Diversification into nonhospital markets provides additional financial stability to systems; separate lines of business offer the potential of offsetting cash flow demands during the trough of the hospital's business cycle.

Twelve studies have investigated the effect of investor-owned systems on hospital costs. These studies do not address the question, "How does the entrance of a system hospital into a market area affect area per capita hospital and total medical care costs?" With this caveat in mind, the evidence indicates that the growth of systems results in higher hospital costs.

If systems hold certain technical advantages over independent hospitals, why don't they provide care more cheaply? First, investor-owned systems use their superior access into the capital markets to increase services, and provide more ancillary services per case. Second, markups, the difference between hospital unit expenses and charges, are greater for system hospitals. Third, available evidence indicates that system hospitals are newer, thereby increasing capital costs.

Some have alleged that investor-owned systems reduce access to care to the disadvantaged. Research on this issue is limited to seven studies. Findings may be artifacts of the matching process, where hospitals are matched on dependent variables, and consequently, no differences are found between experimental and control hospitals. Until recently, investor-owned systems have shunned large tertiary care teaching facilities and chosen to locate in growing middle-class markets. With this caveat in mind, study findings indicate little difference between system and control hospitals in access to care. System hospitals treat equivalent numbers of Medicare and Medicaid in-patients. No significant differences were found in the diagnostic case mix of system versus matched independent nonprofit hospitals. Two studies report that investor-owned system hospitals treat similar percentages of uncompensated care (defined as bad debt plus charity care) as do control hospitals, although neither system nor control hospital treated many.93 One study found that investor-owned system hospitals provided a lower percentage of uncompensated care.94

Four studies examined differences in quality of care between system and independent hospitals. Quality measures included physicians, qualifications, hospital accreditation, educational and residency programs, nursing staff composition, malpractice convictions, and gross mortality, rates. In most cases, no differences were found between system and independent hospitals.

Our review of the literature identified a number of issues that empirical studies failed to answer. In concluding this paper with an agenda for future research, we urge researchers to focus on three methodological issues. First, future research should document market area spillover effects. To what extent are profits and savings from investor-owned systems the result of shifting undesirable services and patients to other hospitals? Conversely, do systems force efficiencies on other area hospitals? Small area case studies may be one method for addressing these issues. Second, researchers should more fully consider patterns of entry and exit in investor-owned system performance. System hospitals should be compared to contrasting, as well as similar, independent hospitals. Third, researchers should contrast the behavior of investor-owned system and independent hospitals under different incentive and reimbursement structures. The adoption by Medicare of DRG prospective hospital payment provides the opportunity to study a natural experiment.

Acknowledgments

The views expressed in this paper axe those of the authors. No official endorsement by the National Center for Health Services Research or the Department of Health and Human Services is intended or should be inferred.

The authors wish to thank Fred Hellinger, Ira Raskin, Larry Rose, and Jackie Wallen for their helpful comments. We additionally thank Christine Mitchell and Eloise Van Riper for their secretarial support.

Many of the observations of this paper were presented in "Multihospital Systems: Issues and Empirical Findings," which appeared in the Spring 1984 edition of Health Affairs.

1. Relman, A. (1980) The new medical-industrial complex, The New England Journal of Medicine 303(17):963.

2. Cobbs, D. American Hospital Association, Center for Multi-Institutional Arrangements, personal communication; American Hospital Association, Hospital Statistics: 1984 Edition. Chicago, Illinois.

3. Cobbs, D. American Hospital Association, Center for Multi-Institutional Arrangements, personal communication.

4. Federation of American Hospitals (1985) 1985 Directory: Investor-Owned Hospitals and Hospital Management Companies.

5. Koenig, P. (1979) Skimming the profits off health care, Nation 229:619.

6. Health Central System (1983) Environmental Assessment: Health Care, New Dynamics, New Markets.

7. Steinwald, B., and D. Neuhauser (1970) The role of the proprietary hospital, Law and Contemporary Problems 35:817-838.

8. Federation of American Hospitals, 1985 Directory: Investor-Owned Hospitals and Hospital Management Companies. This figure includes 31 investor-owned independent hospitals managed by investor-owned systems.

9. Ibid.

10. American Hospital Association, Hospital Statistics, 1984 Edition . Data from the AHA's Center for Multi-Institutional Arrangements indicate that from 1979 to 1983, nonprofit system hospitals grew at an annual rate of 1.2 percent while investor-owned systems grew at 3.6 percent.

11. Op. cit. American Hospital Association, 1984 Annual Report. Data from the AHA's Center for Multi-Institutional Arrangements indicate that between 1979 and 1983 the number of hospital beds controlled by non-profit multihospital systems grew at an average annual rate of 0.4 percent while investor-owned systems grew at 5.2 percent.

12. American Hospital Association, Hospital Statistics, 1984 Edition.

13. Sager, A. (1983) Why urban voluntary hospitals close, Health Services Research 18(3):451-474.

14. Federation of American Hospitals (1982) Statistical Profile of the Investor-Owned Hospital Industry, Washington, D.C.

15. Mullner, R., and J. Hadley (1984) Interstate variations in the growth of chain-owned proprietary hospitals, 1973-1982, Inquiry 21:144-151; Mullner, R., C. Byrne, and J. Kubal (1981) Multihospital systems in the United States: A geographic overview, Social Science and Medicine 15:353-359.

16. Federation of American Hospitals, 1985 Directory: Investor-Owned Hospitals and Investor-Owned Management Companies.

17. Franz, J. (1984) Hospitals turn from acquiring to building new psychiatric units, Modern Healthcare, May 15, Ermann, D., and J. Gabel (1984) Multihospital systems: Issues and empirical findings, Health Affairs 3(1):54.

18. Federation of American Hospitals, 1985 Directory: Investor-Owned Hospitals and Hospital Management Companies.

19. Hospital Corporation of America (1983) Form 10-K, Securities and Exchange Commission.

20. National Medical Enterprises (1983) Form 10-K, Securities and Exchange Commission.

21. Buchanan, R. (1982) The financial status of the new medical-industrial complex, Inquiry 19:308-316.

22. Cohodes, D., and B. Kinkead (1984) Hospital Capital Formation in the 1980s, Johns Hopkins University Press, Baltimore, Md., p. 81.

23. Greenberg, J. (1984) Investment Trends in the Hospital Industry,, unpublished manuscript, Health Care Financing Administration, Washington, D.C.

24. Washington Health Cost Letter (1984) special supplement, Washington Business Information, Inc., August 3. Estimates of the value of stock option benefits are based on Form 10-K for the four major investor-owned hospital management companies.

25. Lewin and Associates, Inc. (1981) Studies in the Comparative Performance of Investor-Owned and Not-for-Profit Hospitals, Vol. I, Industry, Analysis, Washington, D.C., pp. 8-9.

26. Brown, M. (1979) An overview in Multihospital Arrangements: Public Policy Implications, S. Mason, ed., American Hospital Association; Barrett, D. (1980) Multihospital Systems: The Process of Development , Cambridge, Mass.: Oelgeschlager, Gunn and Hain, Publishers, Inc., p. 27; Zuckerman, H. (1979) Multi-Institutional Hospital Systems, L. Weeks, ed., Chicago, Ill.: Hospital Research and Educational Trust; and Hernandez, M., and C. G. Howie, Capital financing by multihospital systems in Multihospital Arrangements: Public Policy Implications, S. Mason, ed.

27. Brown, M. (1979) Systems development trends, issues and implications, Health Care Management Review 4:23-32.

28. Anderson, J., and P. Ginsberg (1984) Medicare payment and hospital capital, Health Affairs, 3(3):35-48.

29. Mistarz, J. (1984) Capital: A crisis? Hospitals, January 1, pp. 70-74.

30. Wilson, G., C. Sheps, and T. Oliver (1982) Effects of hospital revenue bonds on hospital planning and operations, New England Journal of Medicine 307(23):1426-1430; Kinkead, B. (1984) Medicare payment and hospital capital: The evolution of policy, Health Affairs 3(3):49-74.

31. Telephone conversation with Jim Smith, Hospital Corporation of America, February 8, 1985.

32. Toomey, R. E., and R. C. Toomey (1976) Political realities of capital formation and capital allocation, Hospital and Health Services Administration 20:11-23; Regulation discouraging chains, shared services (1978) Modern Healthcare 8:9-10; Sloan, F., and R. Vraciu (1983) Investor-owned and not-for-profit hospitals: Addressing some issues, Health Affairs 2:25-37; Neuman, B. (1974) A financial analysis of a hospital merger: Samaritan Health Services, Medical Care 12:983-998; DiPaolo, V. (1980) Multi-units increasing municipal bond issues, Modern Healthcare 10:56-58; and Op. cit., Hernandez and Howie, Capital financing, pp. 37-47.

33. Yanish, D. Leigh (1981) Pooled assets expand debt capacity, Modern Healthcare 11:86-88.

34. Access to capital: Equity markets (1984) Washington Report on Medicine and Health/Perspectives, McGraw-Hill, Feb. 20.

35. Capital Development in the Hospital Industry (1984) Health Policy Alternatives, Inc., Washington, D.C., June.

36. Cohodes, D., and B. Kinkead (1984) Capital formation in hospital management companies in Hospital Capital Formation in the 1980s, Johns Hopkins University Press, Baltimore, Md., pp. 73-87.

37. Op. cit., Hernandez and Howie, Capital financing, pp. 37-47.

38. Ibid.

39. Ibid.

40. Op. cit., Health Policy Alternatives, Inc., 1984.

41. Dorenfest, S. (1981) Hospital chains become important providers, Modern Healthcare 2:77-85; and Bennet and Ahrendt (1981) Achieving economies of scale through shared ancillary services, Topics in Health Care Financing 7(3):25-34.

42. Steward, D. (1973) The history and status of proprietary hospitals, Blue Cross Reports 9:2-9; Hill, D., and D. Stewart (1973) Proprietary hospitals versus nonprofit hospitals: A matched sample analysis in California, Blue Cross Reports 9:10-16; and Steinwald, B., and D. Neuhauser (1970) The role of the proprietary hospital, Law and Contemporary Problems in Health Care, Vol. 37, Autumn. Duke University School of Law.

43. Bennett, J., and K. Ahrendt (1981) Achieving economies of scale through shared ancillary and support services, Topics in Health Care Financing: Managing in the Era of Limits 7(3):25-34.

44. Stevenson, G. (1978) Laws of motion in the for-profit health industry: A theory and three examples, International Journal of Health Services 8(2):234-256.

45. Analyst gives AMI hospitals mixed reviews (1984) Hospitals, Jan. 1, p. 22; HCA hospitals' costs, efficiency studied (1984) Hospitals , Feb. 1, p. 21; Humana hospitals found more efficient, less costly than average U.S. hospital (1984) Hospitals, March 16, p. 22; NME hospitals expensive but efficient (1984) Hospitals, May 16, p. 21; Knowles, E. (1981) Distinguishing characteristics of institutions by ownership type within multihospital systems, graduate thesis, University of Minnesota, Jan. 30; Ferber, B. (1971) Analysis of chain-operated for-profit hospitals, Health Services Research 6:49-60; Treat, T. (1976) The performance of merging hospitals, Medical Care 14:199-209; Lewin, L., R. Derzon, and R. Marguiles (1981) Investor-owned and nonprofits differ in economic performance, Hospitals 55:52-58; Coyne, J. (1982) Hospital performance in multihospital systems: A comparative study of system and independent hospitals, Health Services Research 17:3BB-329.

46. DiPaolo, V. (1980) American Medical International acquires Hyatt Medical for about $60 million, Modern Healthcare 10:12-13; DiPaolo, V. (1980) Highly diver-sifted National Medical Enterprises show it's able to do it all, Modern Healthcare 10:58-60; Keenam, C. (1981) Not-for-profit systems position themselves to meet upcoming challenges, Hospitals 5:77-80; Op. cit., Longest, A conceptual framework; Toomey, R. E., and R. C. Toomey (1980) Political realities of capital formation and capital allocation in Multi-Hospital Systems: Strategies for Organization and Management, M. Brown and B. McCool, eds. Germantown, Md: Aspen Systems Corp.; Op. cit., Levin and Associates, pp. 35-58.

47. Woodford, B. G. (1981) Is diversification for you? Topics in Health Care Financing 7:32-43; Op. cit., Zuckerman, Multi-institutional hospital systems, pp. 4-8; Coyne, J. (1981) Networking and the future of not-for-profit hospitals, Hospitals 55:83-85; Mason, S. (1981) Hospital diversification as a competitive strategy, paper prepared for the Bureau of Health Planning, Health Resources Administration, U.S. Department of Health and Human Services, Washington, D.C., November, p. 4.

48. General Accounting Office (1982) Hospital Links with Related Firms Can Conceal Unreasonable Costs and Increase Administrative Burden, Thus Inflating Health Program Expenditures, report to the Secretary of Health and Human Services, January 19.

49. Seermon, L., M. Sachs, and K. Thompson (1984) Alternative services offer hospital systems local market control, Modern Healthcare, May 1, pp. 78-87; Tatge, M. (1984) Hospital systems race to form PPO networks to regain market share, Modern Healthcare, May 1, pp. 21, 24; Gabel, J., and D. Ermann (1985) Preferred provider organizations: Performance, problems and promise, Health Affairs, Spring; Punch, L. (1985) Humana money, name may cure financial woes of Doctors Officenters, Modern Healthcare, January 4, pp. 49, 52, 54, 56; Ermann, D., and J. Gabel (1985) The changing face of American health care: Multihospital systems, emergency centers and surgery centers, Medical Care, May.

50. Wheeler, J., H. Zuckerman, and J. Aderholdt (1982) How management contracts can affect hospital finance, Inquiry 19:160-166; Op. cit., Lewin and Associates, Studies in Comparative Performance; DiPaolo, V. (1979) Chains grow with unbundled services, Modern Healthcare 9:54-56; Johnson, D., and V. DiPaolo (1981) Nonprofits compete effectively with investor-owned contract firms, Modern Healthcare 11:84-86; and Pattison, R., and H. Katz (1982) Investor-owned hospital management companies: Growth strategies and their implications, draft contract final report for Bureau of Health Facilities, Health Resources Administration, U.S. Department of Health and Human Services, June, p. 69.

51. Op. cit., Pattison and Katz, Investor-owned hospital management companies,

52. Cobbs, D. American Hospital Association, personal communication.

53. Op. cit., DiPaolo, pp. 12-13; Op. cit., Johnson and DiPaolo; LaViolette, S. (1980) HCA builds white knight image in its quest for new markets, Modern Healthcare 11:56-60; Op. cit., Lewin and Associates, p. 58.

54. Op. cit., Lewin and Associates, Studies in Comparative Performance , Vol. 99; Op. cit., Brown, An overview, Vol. 27.

55. Treat, T. (1976) The performance of merging hospitals, Medical Care 14:199-209; Edwards, S. (1972) Demonstration and Evaluation of Integrated Health Care Facilities, Phoenix: Samaritan Health Services, Chicago: Health Services Research Center of the Hospital Research and Educational Trust, and Chicago: Northwestern University, June; Cooney, J., and T. Alexander (1975) Multihospital Systems: An Evaluation, Parts I-IV, Chicago: Health Services Research Center of the Hospital Research and Educational Trust and Northwestern University; Zuckerman, H. (1981) Multi-institutional systems: Adaptive strategy for growth, survival, Hospital Progress 62:43-45; Paulsen, R. (1981) The role of the multi-hospital system, Texas Hospitals 36:30-33; Money, W., D. Gilfillan, and R. Duncan (1976) A comparative study of the multi-unit health care organizations, in Organizational Research in Hospitals , S. Shortell and M. Brown, eds. Inquiry Book BCA, Invitational Forum, Northwestern University, May 12, 1975; Op. cit., Zuckerman, Multi-institutional hospital systems; Op. cit., Zuckerman, Presbyterian Hospital Center, Multi-institutional hospital systems, p. 150.

56. Op. cit., Paulsen, Role of the multi-hospital system, p. 31.

57. Op. cit., Money et al., p. 99.

58. Op. cit., Milburn, pp. 95-96, and Shared management expertise spells survival for the small (1976) Hospitals 50:52-54; Friedrich, P., and A. Ross (1977) Consortium serves rural hospitals' educational needs, Hospitals 51:95-96; and Op. cit., Zuckerman, Presbyterian, p. 150.

59. Studnicki, J. (1979) Multihospital systems: A research perspective, Inquiry 16:315-322; Mason, S. (1980) U.S. multihospital systems, Public Health Reviews 9:259.

60. Op. cit., Mason, U.S. multihospital systems, p. 260; Foley, G. (1980) The ultimate shared service for hospitals: Political synergy, Hospital and Health Services Administration 25(Special II):35-42; Zuckerman (1981) Multi-institutional systems: Adaptive strategy for growth, survival, Hospital Progress 62:43-45; and Simler, S. (1980) Multi-units threaten regulators' clout, Modern Healthcare 10:92.

61. Starkweather, D. (1980) The pros and cons for multihospital systems, Technical Assistance Memo 57, San Francisco: Western Center for Health Planning, November 4, p. 4.

74. Hill, D., and D. Stewart (1971) Proprietary hospitals versus non-profit hospitals, Blue Cross Hospitals, March; Ferber, B., H. Ruchlin, D. Pointer, and L. Cannedy (1973) Comparison of for-profit investor-owned chain and non-profit hospitals, Inquiry, Dec.; Lewin and Associates (1976) A Study of Investor-Owned Hospitals, Chicago: Health Services Foundation; Bayes, C. (1979) Cost comparisons of for-profit and non-profit hospitals, Social Science and Medicine 13c:219-225; Vraciu, R. (1981) HCA hospitals cost less in three states, Modern Healthcare, pp. 70-72; Op. cit., Lewin and Associates, 1981; Pattison, R., and H. Katz (1983) Investor-owned and not-for-profit hospitals: A comparison based on California data, New England Journal of Medicine, 309:347-353; Sloan, F., and R. Vraciu (1983) Investor-owned and not-for-profit hospitals; Addressing some issues, Health Affairs 2:25-37, Coyne, J. (1978) A comparative study of the performance and characteristics of multihospital systems, Ph. D. dissertation, University of California, Berkeley; Becker, E., and F. Sloan (1984) Hospital ownership and performance, Economic Inquiry, June; Op. cit., J. Coyne, Hospital performance in multi-hospital systems.

75. Op. cit,, Lewin and Associates, 1976; Op. cit., Lewin and Associates, 1981.

76. Op. cit., Ruchlin et al.; Op cit., Lewin and Associates, A Study of Investor-Owned Hospitals; Op cit., Lewin and Associates, Studies in Comparative Performance; Op cit., Pattison and Katz, Comparison based on California data; Sloan and Vraciu, Investor-owned and not-for-profit hospitals.

77. Op. cit., Sloan and Vraciu (1983); Kinkead, B. Historical Trends in Hospital Capital Investment, Urban Systems Research and Engineering, Inc., DHHS Contract No.: HHS-100-820038; F. Sloan, unpublished data, Vanderbilt University, personal communication.

78. New York Times (January 25, 1985), Companies buy hospitals, treatment of poor is debated; Lewin and Associates (1981) Studies in the Comparative Performance of Investor-Owned and Not-For-Profit Hospitals: Two Case Studies of Competition Between Hospitals, Vol. 3; Kennedy, L. (1984) For-profit health care: Who shall pay? Unpublished paper presented at American Public Health Association meeting, Anaheim, California.

79. White, W. (1979) Regulation and competition in a non-profit industry, Inquiry 16(2):50-61.

80. Bayes, C. (1977) Case mix differences between for-profit and non-profit hospitals, Inquiry 14(1):19-23.

81. Op. cit., Lewin and Associates (1981).

62. Ferber, B. (1971) Analysis of chain-operated for-profit hospitals, Health Services Research 6:49-60.

63. Hill, D., and D. Stewart (1971) Proprietary hospitals versus non-profit hospitals, Blue Cross Hospitals, March.

64. Ruchlin, H., D. Pointer, and L. Cannedy (1973) Comparison of for-profit investor-owned chains and nonprofit hospitals, Inquiry 10(December).

65. Lewin and Associates, Inc. (1976) A Study of Investor-Owned Hospitals , Health Services Foundation, Chicago, Illinois.

66. Coyne, J. (1978) A comparative study of the performance and characteristics of multihospital systems, Ph. D. dissertation, University of California, Berkeley.

67. Bays, C. (1979) Cost comparisons of for-profit and non-profit hospitals. Social Science and Medicine, 13c:219-225.

68. Vraciu, R. (1981) HCA hospitals. cost less in three states, Modern Healthcare 11:70-72.

69. Lewin and Associates, Inc. (1981) Studies in the Comparative Performance of Investor-Owned and Not-For-Profit Hospitals, Vol. 1, Industry, Analysis, Washington, D.C., pp. 8-9.

70. Pattison, R., and H. Katz (1982) Investor-owned hospital management companies: Growth strategies and their implications, draft contract final report for the Bureau of Health Facilities, Health Resources Administration, U.S. Department of Health and Human Services, June, p. 69.

71. Sloan, F., and R. Vraciu (1983) Investor-owned and not-for-profit hospitals: Addressing some issues, Health Affairs 2:25-37.

72. Coyne, J. (1982) Hospital performance in multihospital systems: A comparative study of systems and independent hospitals, Health Services Research 17:302-329.

73. Becker, E., and F. Sloan (1984) Hospital ownership and performance, Economic Inquiry, 22, July.

82. Op. cit., Ruchlin et al., Comparison; Op. cit., Lewin and Associates, Study of Investor-Owned Hospitals; Op. cit., Bays, Cost comparisons; Op. cit., Sloan and Vraciu, Investor-owned and not-for-profit hospitals; Op. cit., Biggs, Kralewski, and Brown, Contract-managed and traditionally managed non-profit hospitals; Op. cit., Pattison and Katz, Comparison based on California data; Sloan, F., J. Blumstein, and J. Perrin (1986) Uncompensated Hospital Care: Rights and Responsibilities, Johns Hopkins University Press.

86. Op. cit., Lewin and Associates, Study of Investor-Owned Hospitals ; Op. cit., Sloan and Vraciu, Investor-owned and not-for-profit hospitals; Op. cit., Biggs, Kralewski, and Brown, Contract-managed and traditionally managed non-profit hospitals.

87. Op. cit., Pattison and Katz, Comparison based on California data; Op. cit., Sloan and Vraciu, Investor-owned and not-for-profit hospitals; Op. cit., Sloan, Blumstein, and Perrin, Uncompensated Hospital Care: Rights and Responsibilities.

88. Simler, S. (1984) Austin questions HCAs loyalty to town, Modern Healthcare 4:38; Dallek, G. (1983) For-profit hospitals and the poor, National Health Law Programs, Washington, D.C., October.

89. Op. cit., Lewin and Associates, Study of Investor-Owned Hospitals ; Op. cit., Sloan and Vraciu, Investor-owned and not-for-profit hospitals; Op. cit., Biggs, Kralewski, and Brown, Contract-managed and traditionally managed non-profit hospitals.

90. Op. cit., Lewin and Associates, Study of Investor-Owned Hospitals ; Op. cit., Bays, Cost comparisons.

91. Op. cit., Lewin and Associates, Study of Investor-Owned Hospitals ; Op. cit., Biggs, Kralewski, and Brown, Contract-managed and traditionally managed non-profit hospitals; Op. cit., Cooney and Alexander, Multihospital systems.

92. Op. cit., Ruchlin, Pointer, and Cannedy, Comparison; Op. cit., Lewin and Associates, Study of Investor-Owned Hospitals; Op. cit., Pattison and Katz, Comparison based on California data.

83. Sloan, F., J. Blumstein, and J. Perrin (1985) Uncompensated Hospital Care: Rights and Responsibilities. Johns Hopkins University Press.

84. Biggs, E. L., J. E. Kralewski, and G. D. Brown (1980) Contract-managed and traditionally managed nonprofit hospitals, Medical Care 18:585-596.

85. Pattison, R., and H. Katz (1983) Investor-owned and not-for-profit hospitals: A comparison based on California data, New England Journal of Medicine 309:347-353.

93. Op. cit., Pattison and Katz, Comparison based on California data; Op. cit., Sloan and Vraciu, Investor-owned and not-for-profit hospitals.

94. Op. cit., Sloan, Blumstein, and Perrin, Uncompensated Hospital Care: Rights and Responsibilities.

Mr. Ermann is affiliated with the National Center for Health Services Research, U.S. Department of Health and Human Services, Rockville, Maryland. Mr. Gabel is with the Health Insurance Association of America.

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