The study found financial benefits of having a hospital system, but it comes with possible risks of losing quality

Large hospital systems control eight of every 10 hospital beds in the United States — and their number is growing — but until now, little is known about how system ownership affects hospital operations.

To learn more, Benjamin Ukert, Ph.D., and Elena Andreyeva, Ph.D., both of Texas A&M University School of Public Health, worked with colleagues from the University of Pennsylvania, the Wharton School, and Humana to study more than 100 independent hospitals that had taken over the system. Their findings were published in Journal of Political Economy Microeconomics.

“Can large health care provider networks increase operational efficiency while maintaining quality of care?” Ukert said. “That’s the key question.”

Ukert said research in other market sectors has shown that independents gain certain benefits from joining a chain, such as brand reputation and access to capital and best practices. On the other hand, larger organizations often raise prices, which can reduce efficiency.

The hospital industry is now dominated by multisite companies—or systems—largely as a result of the takeover of independent hospitals in a process that researchers call corporatization. System control of the nation’s hospital beds has risen from 58% in 2000 to 81% in 2020, with a similar increase in the employment share.

For their research, the researchers used four data sources from 2012–2018:

• Annual survey by the American Hospital Association to track changes in hospital ownership structure, capital and employee expenditures, operating costs and breadth of service offerings
• Medicare fee-for-service claims and discharge data from all-payer hospitals in New York State to provide a broad analysis of changes in hospital quality
• Administrative claims data for enrollees in employer-sponsored plans at Elevance Health (formerly Anthem), one of the largest health insurers in the United States
• Miscellaneous public use files from the federal government.

The researchers compared the changing patterns of hospitals that were acquired by systems (whether originally stand-alone hospitals or acquired from other systems) during the years studied with the patterns of hospitals that did not change ownership. They also restricted their comparison hospitals to those that closely matched the acquired hospitals in attributes such as number of beds, operating cost per bed, type of profit, and rural county status.

“We found that system ownership led to an overall price increase of 6%, with relatively large price increases in supplies, cardiac care, and respiratory care,” Ukert said. “There were two dimensions with greater variability in consumer prices: targets that were initially disadvantaged (due to their size or price level), which seemed to benefit more from system acquisitions, and intramarket transactions, which led to larger price increases.”

A similar difference in price increases was found in cases where the target hospital was already owned by the system, suggesting that system ownership does not provide an advantage in price negotiations with insurers.

“This could indicate that the price increase may be driven more by traditional antitrust concerns about market power than by an increase in the bargaining power of the target,” Ukert said.

The team found no changes in the number of patients in target hospitals after taking over the system.

“This means that patients’ perceptions of hospital quality have not changed, which is consistent with the results of other recent studies,” Ukert said.

The researchers found that hospital corporatization provides newly acquired target hospitals with large operating cost benefits that are more valuable than the revenue increases achieved through higher prices, resulting primarily from lower capital costs and staff reductions.

“Corporatization itself increases efficiency, and larger acquirers realize much greater cost reductions when they acquire independent hospitals,” Ukert said.

“Every dollar of savings in personnel costs reduces expected commercial revenues by 30 cents through lower prices, and in the long run, greater corporatization should lower market-level costs and increase reimbursement rates for public payers.”

On the other hand, the study found an increase in readmission rates in the short term across three different patient groups across multiple payers and disease groups—possibly due to staffing reductions—suggesting that system ownership does not improve hospital quality and may actually reduce it.

“Most studies of this type have focused on transactions involving two independent hospitals in the same local market that either merge, create a new system, or involve multiple types of transactions, including acquisitions by systems,” Ukert said. “Our focus on corporatization provides decision makers with additional considerations for the expansion of system ownership.”