For-profit hospitals in Virginia don't manage their costs as well as their not-for-profit counterparts in the state, but they still make more money, according to a new study.
The study, by three Virginia researchers, is the second to knock the perception that for-profit hospitals are more efficiently run than not-for-profits. The new study appears in latest issue of Hospitals and Health Services Administration.
Earlier this year, a controversial report in the New England Journal of Medicine found higher overhead costs at for-profit hospitals (March 17, p. 2).
In the Virginia study, for-profit hospitals had 17.1% higher costs per admission in 1993 than not-for-profits, even after data were adjusted for the taxes paid by for-profits. The researchers said the difference remained statistically significant after controlling for system affiliation, location, size and payer mix.
At the same time, however, the average operating profit margin at the 13 for-profit hospitals in the study was 8.1% in 1993. The 70 not-for-profits examined had an average operating profit margin of 3.84%.
The researchers attributed the higher profit margins to higher prices charged by for-profit hospitals along with higher patient volume and more privately insured patients than not-for-profit hospitals.
The data come from the Virginia Health Services Cost Review Council. State-owned university hospitals and city-owned hospitals are excluded. The study was carried out by Ramesh Shukla, John Pestian and Jan Clement of Virginia Commonwealth University in Richmond.
Studies using data from the 1970s and 1980s show higher profits at for-profit facilities because of "revenue-enhancement strategies," such as pricing and payer mix. But changes in Medicare payment and the growth of managed care are expected to lead to better cost-management at hospitals.
"To date, neither the for-profit nor the not-for-profit hospitals have shown any superior performance in managing costs; they are equally ineffective. . . . It is very likely that in this world of incremental changes the relative advantages of the past for the for-profit hospitals are still embedded in new contracts with the insurance and managed-care companies," the study said.
The problem is that hospitals' cost structures can't be changed significantly without re-engineering production and delivery systems, a complex process, the researchers wrote.