Health Care Costs and Financing

Many community hospitals keep operating despite economic woes

The decline in inpatient hospital use during the 1980s led to a substantial decline in hospital profit margins from an industry average of 7.3 percent in 1983 to 3.8 percent in 1989. Yet many hospitals continued to operate, including several that were experiencing major difficulties in meeting short- and long-term obligations. A recent study showed that 91 percent of financially distressed hospitals continued to operate without major structural change between 1985 and 1990.

This may be good news to local community officials concerned about maintaining financially weakened hospitals. On the other hand, these weakened institutions may not be providing the best services to their communities because their survival may depend on the absence of viable competitors to which patients can turn. The study showed, for example, that merging and surviving hospitals were in counties where the number of rivals was reduced, while hospitals that closed were in counties with a greater number of rival hospitals.

The long-term financial distress of these weakened but surviving hospitals could lead to the failure of some integrated provider networks if their financial problems are not fully understood, caution Chicago researchers Gloria Bazzoli, Ph.D., and Steven Andes, Ph.D. Their study, which was supported in part by the Agency for Health Care Policy and Research (HS06250), was based on analysis of the American Hospital Association's Annual Survey of Hospitals from 1983 through 1990 and the Area Resource File of the U.S. Bureau of Health Professions.

Details are in "Consequences of hospital financial distress," by Drs. Bazzoli and Andes, in the Winter 1995 issue of Hospital & Health Services Administration 40(4), pp. 472-495.

Some financially distressed rural community hospitals discontinue acute care

Faced with financial problems and the possibility of closure, some rural community hospitals are converting from general acute inpatient care to other services such as short-term emergency care, primary care, long-term care, and other specialized community health services. According to a recent study, rural hospitals that convert to these services are more likely than nonconverters to have demonstrated poor performance and have fewer beds; to be located very near to or very far from similar hospitals; operate in larger communities where a market exists for these alternative services; already devote more of their care to areas other than acute inpatient care; and to be members of multihospital systems.

Converting hospitals also are less likely to be government owned, according to the study, which was supported by the Agency for Health Care Policy and Research (HS07047). The benefit of these conversions is that access to health care in rural communities is maintained and hospital closure avoided, explains Jeffrey A. Alexander, Ph.D., of the University of Michigan.

Dr. Alexander and his colleagues used data from the American Hospital Association's annual survey files from 1983 to 1991 and other sources to identify rural hospital conversions that occurred nationally from 1984 to 1991. Their analysis revealed that a total of 148 rural community hospitals converted to another form of health care delivery. Of these, 38 percent became long-term care facilities, 50 percent outpatient care providers, and 11 percent substance abuse centers; 4 percent shifted to other specialized inpatient services.

Details are in "Determinants of rural hospital conversion: A model of profound organizational change," by Dr. Alexander, Thomas A. D'Aunno, Ph.D., and Melissa J. Succi, M.A., in the January 1996 issue of Medical Care 34(1), pp. 29-43.

Employment-related health insurance effectively pools medical risk among employees

More than 88 percent of the privately insured, nonelderly U.S. population obtains its health insurance through employment. By pooling people with diverse health risks, employment-related health insurance effectively transfers income from households in good health to those with greater medical needs, according to a study by the Agency for Health Care Policy and Research. A key factor in the distribution of health benefits to policyholders is the current tax subsidy, which results from the exclusion of employer health insurance contributions from employees' taxable income.

Eliminating this tax subsidy should be considered with caution, advise study authors, Alan C. Monheit, Ph.D., and Thomas M. Selden, Ph.D., of AHCPR, and Len M. Nichols, Ph.D., of the Urban Institute. They point out that the tax subsidy narrows employee monetary loss from the purchase of health insurance from -$711 to -$197 (in 1987 dollars) and thereby may encourage continued participation of young and healthy households in the employment-related insurance market. Their study was based on analysis of data from the 1987 National Medical Expenditure Survey to examine how the tax subsidy alters the distribution of net health insurance benefits (reimbursed medical care expenditures plus tax subsidies from employer contributions to health insurance less premiums) across households according to age, sex, income, health status, and number of policyholders.

The researchers studied the distribution of net health insurance benefits across health insurance units (HIUs), defined as all policyholders of employment-related coverage in a household, ages 20 to 64, and their nonelderly covered dependents. Controlling for HIU characteristics, the researchers found that HIUs which included a member with a chronic health problem had net benefits some $700 above HIUs whose members lacked such problems. There were no significant differences in net benefits between white and black policyholders or in net benefits by policyholder age or firm size. However, HIUs with female policyholders, large HIUs, and those with high wage earners obtained large net health insurance benefits.

More details are in "How are net health insurance benefits distributed in the employment-related insurance market?" by Drs. Monheit, Nichols, and Selden, which appears in the Winter 1995/96 issue of Inquiry 32, pp. 379-391.

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