The Coyne et al. study And The Messina et al Use of Literature: How effectively do you think the Coyne et al. study and the Messina et al. study both used their review of literature to help the reader understand why the research question was asked? How could they have done it more effectively?
ospital Cost and Efficiency: Do Hospital Size and Ownership Type Really Matter?
Coyne, Joseph S, DrPH; Richards, Michael Thomas; Short, Robert, PhD; Shultz, Kim; Singh, Sher G; et al. Journal of Healthcare Management http://search.proquest.com.library.gcu.edu:2048/assets/r20141.2.4-2/core/spacer.gif54.3http://search.proquest.com.library.gcu.edu:2048/assets/r20141.2.4-2/core/spacer.gif (May/Jun 2009): 163-74; discussion 175-6.
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The primary research question this study addresses is whether size and ownership type make a difference in the efficiency and cost results of hospitals in Washington State. A further question is on what factors might explain such differences. The data source is the hospital financial data reports Washington hospitals submit to the Washington Department of Health. The sample was restricted to not-for-profit and government-owned hospitals, given that these ownership types are predominant in Washington State, and there are only two investor-owned hospitals. The measures of efficiency and cost represent the generally accepted financial indicators derived from the healthcare financial management literature. These findings deserve further study on a regional or national level. A more scientific study of the efficiency and cost of hospitals by size and ownership type would be important to control for case mix, scope of services, and payer mix.
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The primary research question this study addresses is, do size and ownership type make a difference in the efficiency and cost results of hospitals in Washington State? A further question is, what factors might explain such differences? The data source is the hospital financial data reports Washington hospitals submit to the Washington Department of Health. The sample was restricted to not-for-profit and governmentowned hospitals, given that these ownership types are predominant in Washington State, and there are only two investor-owned hospitals.
The measures of efficiency and cost represent the generally accepted financial indicators derived from the healthcare financial management literature. Cost and efficiency in these hospitals are analyzed using five efficiency ratios and five cost measures. The results are significant for five of the ten measures studied. Measured by occupancy percentage, small and large not-for-profit hospitals appear to achieve higher efficiency levels than government-owned hospitals do, but the larger hospitals of both ownership types report greater efficiency than that achieved by smaller hospitals. In terms of costs, small, not-for-profit hospitals report comparable costs to those of the largest hospitals, likely because 70 percent of the small not-for-profits are critical access hospitals.
These findings deserve further study on a regional or national level. A more scientific study of the efficiency and cost of hospitals by size and ownership type would be important to control for case mix, scope of services, and payer mix. Such studies can generate important findings about the relationship of hospital size and ownership type to efficiency and cost. Conducted on a national level, such studies would provide policymakers with the empirical data they need to make decisions regarding the types of hospitals to encourage or discourage in the future.
Hospital size has long been an area of discussion and debate in the U.S. healthcare industry. Questions have consistently focused on cost management or efficiency in large versus small hospitals. A persistent question among researchers is whether efficiencies are associated with larger facilities through economies of scale, or if there are alternate scenarios that play a significant part in hospital cost and efficiency.
Researchers have used a wide variety of performance measures to compare hospital performance by organization size. In an earlier study, Coyne (1982) examined performance differences between system and independent hospitals using two cost measures (cost per case and payroll per patient day) and two efficiency measures (admissions per bed and full-time equivalents [FTEs] per occupied bed). Griffith, Alexander, and Jelinek (2002) examined cash flow, asset turnover, mortality, complications, length of inpatient stay, cost per case, occupancy, change in occupancy, and percent of revenue from outpatient care. When considering the content validity, reliability, sensitivity, and independence of all nine variables, the authors found that all measures except the two occupancy measures are good gauges of hospital performance. Pink and colleagues (2006), with a technical advisory group, created a financial indicators report specifically for critical access hospitals (CAHs). It includes 20 ratios found to be useful by the chief financial officers of CAHs for measuring profitability, liquidity, revenue, cost, and utilization. Griffith and colleagues (2006) analyzed Medicare data from more than 2,500 hospitals for a five-year period ending in 2003 that showed only a few of their nine measures exhibited signs of improvement, with most indicating volatility or only modest improvements.
Prior hospital performance research findings have been inconclusive in regard to hospital size, such that further study is needed. Yafchak (2000) examined the possibility that hospitals gain economies of scale as size increases. He found that prior to 1994 there were diseconomies of scale in nonteaching hospitals, and that from 1989 to 1997 there were economies of scale, overall, in larger hospitals. Ozcan and Luke (1993) found that hospital ownership and percentage of Medicare were the factors most associated with hospital efficiency, and facility size was consistently and positively related to efficiency due to economies of scale.
This article analyzes the cost and efficiency by size of not-for-profit and government-owned hospitals in the state of Washington. Five efficiency ratios and five cost measures were used. The primary research question is, do size and ownership type make a difference in the efficiency and cost results of hospitals in Washington state? A further question addressed is, what factors might explain the results of this analysis and provide some recommendations for managerial policies and practices in hospitals?
Measures and Data
The measures of efficiency and cost represent the generally accepted financial indicators derived from the healthcare financial management literature. The data source is the financial reports hospitals submit to the Washington Department of Health. The sample was restricted to not-for-profit and government-owned hospitals, given that these are the predominant ownership types in Washington State, and there are only two investor-owned hospitals (see Table 1).
The study sample accounts for 98 percent of the hospitals in the state. The study uses three size categories: small (1-40 beds), medium (41-150 beds), and large (151 or more beds). These size categories were chosen because of the relatively even distribution of hospitals across the three. A national data set might benefit from more size categories, particularly for the larger facilities. In Washington State, there are only 27 hospitals wim more than 150 beds, 35 small and 34 medium-sized hospitals; further, there is an insufficient sample of facilities in excess of 200 beds. Indeed, in considering statistical power for comparative testing purposes, additional size categories cannot be justified. Given cost-based reimbursement for the small size category of hospitals, special consideration of the CAH is provided in the Discussion section.
The industry averages are represented by the median values for the year 2004 and for the Far West Region, to account for regional variations. As noted in Table 2, the industry averages are derived from the 2006 Almanac of Hospital Financial and Operating Indicators compiled by Ingenix (Parkinson 2006).
Efficiency indicators. The five efficiency indicators in this study are frequently used as measures of hospital performance. It is important to note that the occupancy percentage is based on the available beds and not on the licensed beds (see Table 2).
Cost indicators. The five cost indicators in this study are frequently used as measures of hospital performance. Three of the five cost indicators are adjusted to isolate admissions, discharges, and patient days associated with acute care activity by excluding skilled nursing facility (SNF) and swing beds in the study hospitals.
All measures of cost and efficiency are the mean values for the reporting year 2005. The mean values represent die average for each given size and ownership category.
Histograms were used to examine the distributions of the dependent variables. Two variables (cost per adjusted patient day and cost per adjusted admission) are skewed in their distribution and have been logarithmically transformed to create a more symmetrical distribution and therefore allow a fair statistical test.
Data were tested for differences between hospital sizes (small, medium, and large), for differences between ownership type (not-for-profit versus government-owned), and for differences due to the interaction between hospital size and ownership type using a two-way analysis of variance (ANOVA). SPSS 15.0 for Windows was the statistical package used for conducting the ANOVA tests. Post hoc comparisons of means were examined using Scheffe’s method. Results were considered statistically significant when the probability value was less than 5 percent.
The five key results are as follows:
* Current asset turnover results show that size matters but ownership type (by itself) does not in that this measure of efficiency is significantly lower (p < 0.001) in the small hospitals than in the medium and large hospitals for both ownership types.
* Occupancy percentage results show that size and ownership type matter in that this measure of efficiency is highly significant for the main effects of size and ownership type and their interaction.
* Cost per adjusted patient day results show that hospital bed size matters but ownership type does not in that this cost measure is significantly higher in large hospitals than in mediumsized hospitals (Scheffe’s p = 0.031).
* FTEs per adjusted patient day results show that size does not matter but ownership type does in that FTEs are higher among government hospitals than among not-for-profit hospitals, irrespective of hospital size, with marginal significance (p = 0.047).
* Salary per FTE results show that hospital size and ownership type matter in that this cost measure is higher in the not-for-profit hospitals than in the government hospitals p = 0.015) and higher in the larger hospitals than in the small and medium-sized hospitals (p = 0.027).
The two-way ANOVA p-values are presented for bed size, ownership, and the interaction of bed size and ownership (see Table 3). Of the ten ratios that include two efficiency results and three cost results, five are statistically significant, with a probability value less than five percent.
More specifically, two of the five efficiency ratios show significant results, including current asset turnover (Ratio 3) and occupancy percentage (Ratio 4). Further, three of the five cost ratios show significant results, including cost per adjusted patient pay (Ratio 6), FTEs per adjusted patient day (Ratio 9), and salary per FTE (Ratio 10).
Current Asset Turnover (Ratio 3)
The results show that size matters but ownership type by itself does not in that this measure of efficiency is significantly lower (p < 0.001) in the small hospitals than in the medium and large hospitals for both ownership types (see Figure 1). The interaction between ownership type and bed size is also significant (p = 0.024), which means that not only does size by itself make a difference with this efficiency measure but so does size in combination with ownership type. The small not-for-profit hospitals had the lowest current asset turnover of 2.7, compared to the industry median value of 3.72, while the medium-sized not-for-profit hospitals had the highest current asset turnover of 5.0. Government-owned hospitals reported current asset turnover results approximating the industry average, from 3.5 to 4.1 for the three bed-size categories.
Occupancy Percentage (Ratio 4)
The results show that size and ownership type matter in that this measure of efficiency is highly significant for the main effects of size and ownership type and their interaction (see Table 3). This means that not only are bed size and ownership type significant individually, but also that the difference in occupancy percentage across hospital size categories depends on ownership type. Not-for-profit hospitals generally report higher occupancy rates, with a range of 49 percent for medium-sized to 62 percent for small and large hospitals, as compared with government-owned hospitals, which show a range of 26 percent for small hospitals to 69 percent for large hospitals (see Figure 2), as compared to the industry average of 50 percent.
In general, the large hospitals report higher occupancy rates than the small and medium-sized hospitals (p < 0.001 [by Scheffe] in both cases). Occupancy percentages are comparable between the two ownership types among larger hospitals, with large governmentowned hospitals reporting 69 percent occupancy rates and large not-for-profit hospitals reporting 62 percent, as compared to the industry average of 50 percent. Indeed, the most notable exception to these general patterns is small not-for-profit hospitals, which report a relatively high average occupancy rate of 62 percent, the same as the large not-for-profit hospitals, supporting the U-shaped curve. This is contrary to Halpern and colleagues’ (2006) finding that small hospitals typically have a lower occupancy percentage than large hospitals.
Cost per Adjusted Patient Day (Ratio 6)
The results show that hospital size matters but ownership type does not in that this cost measure is lowest for the medium-sized ($2,081 for not-for-profit and $1,826 for government) hospitals, followed by small ($3,297 for not-forprofit and $2,504 for government) and large ($2,426 for not-for-profit and $2,865 for government) hospitals (p = 0.024). Post hoc comparisons show mat only the difference between the medium-sized and the large hospitals is statistically significant (p = 0.031 using Scheffe’s test). There are no detectable differences between me small and medium or small and large hospitals (see Figure 3).
FTEs per Adjusted Patient Day (Ratio 9)
The results show that size does not matter but ownership type does in that FTEs are higher among government hospitals than among not-for-profit hospitals, irrespective of the hospital size (see Figure 4), with marginal significance (p = 0.047). The range for the government hospitals is from 0.0249 for small to 0.0201 for medium hospitals, while the range for not-for-profit hospitals is 0.0182 for the small to 0.0152 for the medium hospitals.
Salary per FTE (Ratio 10)
The results show that hospital size and ownership type matter. This cost measure is higher in the not-for-profit hospitals than in the government hospitals (p = 0.015) and higher in the larger hospitals than in the small and mediumsized hospitals (p = 0.027). The salaries per FTE in the small and medium-sized hospitals were not statistically different. This produces a stair-step effect for both ownership types (see Figure 5). Further, both ownership types report comparable salaries per FTE (both at approximately $58,000) for larger hospitals.
Some of the small hospitals studied are CAHs. These hospitals can be not-forprofit or government-owned and are cost-based reimbursed, based on the percent of patients that are Medicare/ Medicaid. This could explain why the small hospitals report costs per adjusted patient day that are approximately the same as those of the large hospitals (see Figure 3). Many CAHs report a higher cost structure, in all likelihood because of the cost-based reimbursement.
Overall, CAHs account for 84 percent of beds in the small-sized hospital category; 60 percent of revenue, which is smaller because of the 25-bed size limit; and 70 percent of hospitals (see Table 4). This means the majority of the small-hospital activity is accounted for by the CAHs.
Not only do size and ownership type independently make a difference in reported levels of efficiency, but also sometimes the combination of these factors affects efficiency. Not-for-profit hospitals appear to achieve higher performance levels, as measured by current asset turnover, that show medium and large not-for-profit hospitals operate more efficiently than the industry average or the government hospitals for this measure. Further, small and large not-for-profit hospitals appear to achieve higher efficiency levels, as measured by occupancy percentage, compared with government-owned hospitals, except that the larger hospitals of both ownership types report greater efficiency using this measure (thus the V-shaped curve).
As with the efficiency results, the cost results show that not only do size and ownership type independently make a difference, but also sometimes the combination of these factors affects reported cost levels. Perhaps the most revealing finding is that small, not-for-profit hospitals report costs, using cost per adjusted patient day (Ratio 6), that are just as great as those of the largest hospitals, as shown by the absence of detectable statistical differences in the small and large hospitals’ costs. This is likely related to the fact that 70 percent of these hospitals are CAHs. It is worth noting that the one size category not participating in cost reimbursement (as are the CAHs) or treating the most costly and medically complex cases (as are the large hospitals) is the medium-sized hospitals (of both ownership types), which report the greatest efficiency (lowest costs) for this measure.
Not-for-profit hospitals achieve higher efficiencies measured by FTEs per adjusted patient day (Ratio 9) than government hospitals, irrespective of size, yet they pay their employees more, as evidenced by their significantly higher levels for salary per FTE (Ratio 10). Further, the results show a stair-step effect with a significant jump in pay for the employees of larger hospitals, irrespective of ownership type, and the employees of small hospitals receiving approximately the same pay as the employees of medium-sized hospitals. In terms of pay levels, the small and medium-sized government hospitals are at the industry average, while the not-for-profit hospitals consistently pay above the industry average.
Wang and colleagues (2001) found rural hospitals performed better on cost measures and attributed this to better cost management strategies in smaller facilities. Further consideration of these cost results is shown in a study of salaries in smaller-sized hospitals by Dalton, Slifkin, and Howard (2002), who found that smaller-sized hospitals generally pay less than larger hospitals and employ less skilled labor. This does not appear to be the case with the small not-for-profit hospitals that, in general, pay above the mean.
The key conclusions from this study are obvious after examining the results by size for not-for-profit and government-owned Washington hospitals. The answer to the primary research question-do size and ownership type make a difference in the efficiency and cost results of hospitals?-is a firm yes. Indeed, for five of the ten measures studied here, hospital size and/or ownership type makes a significant difference in the efficiency and cost results.
During periods of economic difficulty, there are discussions about consolidating hospitals. It is reasonable for boards of directors to explore merging hospitals to accumulate assets and increase size. This article provides an analytical framework for evaluating not only merged hospitals but also single hospitals and health systems, according to measures of efficiency and cost as well as industry averages for comparison.
These findings deserve further study on a regional or national level. A more scientific study of the efficiency and cost of hospitals by size and ownership type would be important to control for case mix, scope of services, and payer mix. Given the current economic environment, another important factor is cash liquidity. Access to cash, liquid assets, and lines of credit as needed makes a difference in hospital performance, particularly among the large health systems (Coyne 1987; Coyne and Singh 2008). Such studies can generate important findings about the relationship of hospital size and ownership type to efficiency and cost. Conducted on a national level, such studies would provide policymakers with the empirical data they need to make decisions regarding the types of hospitals to encourage or discourage in the future.
The authors wish to acknowledge the editorial contributions of Ms. Laura Manson, program assistant, Department of Health Policy and Administration, Washington State University, and the technical support of Ms. De Martin, academic coordinator, Department of Health Policy and Administration, Washington State University.
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Coyne, J. S. 1987. “Corporate Cash Management in Health Care: Can We Do Better?” Healthcare Financial Management 41 (9): 76-79.
Coyne, J. S., and S. G. Singh. 2008. “The Early Indicators of Financial Failure: A Study of Bankrupt and Solvent Health Systems.” Journal of Healthcare Management 53 (5): 333-46.
Dalton, K., R. T. Slifkin, and H. A. Howard. 2002. “Rural Hospital Wages and the Area Wage Index.” Health Care Financing Review 24(1): 155-75.
Gapenski, L. C. 2007. Understanding Health Care Financial Management, 5th ed. Chicago: Health Administration Press.
Griffith, J. R., J. A. Alexander, and R. C. Jelinek. 2002. “Measuring Comparative Hospital Performance.” Journal of Healthcare Management 47 (1): 41-57.
Griffith, J. R., A. Pattullo, J. A. Alexander, R. C. Jelinek, and D. A. Foster. 2006. “Is Anybody Managing the Store? National Trends in Hospital Performance.” Journal of Healthcare Management 51 (6): 392-406.
Halpern, N. A., S. M. Pastores, H. T. Thaler, and R. J. Greenstein. 2006. “Changes in Critical Care Beds and Occupancy in the United States 1985-2000: Differences Attributable to Hospital Size.” Critical Care Medicine 34 (8): 2105-12.
Ozcan, Y.A., and R. D. Luke. 1993. “A National Study of the Efficiency of Hospitals in Urban Markets.” Health Services Research 27 (6): 719-39.
Parkinson, J. (ed.). 2006. Almanac of Hospital Financial and Operating Indicators. [Online information; retrieved 3/30/09.] www .ingenixonline.com.
Pink, G. H., G. M. Holmes, C. D’Alpe, L. A. Strunk, P. McGee, and R. T. Slifkin. 2006. “Financial Indicators for Critical Access Hospitals.” Journal of Rural Health 22 (3): 229-236.
Wang, B. B., T. T. H. Wan, J. A. Falk, and D.Goodwin. 2001. “Management Strategies and Financial Performance in Rural and Urban Hospitals.” Journal of Medical Systems 25 (4): 241-55.
Yafchak, R. 2000. “A Longitudinal Study of Economies of Scale in the Hospital Industry.” Journal of Health Care Finance 27 (1): 67-89.
Joseph S. Coyne, DrPH, professor, Department of Health Policy and Administration, and director, Center for International Health Services Research and Policy, Washington State University, Spokane; Michael Thomas Richards, Senior Financial Analyst, Providence Physicians Services, Spokane, Washington; Robert Short, PhD, director, Washington Institute for Mental Health Research and Training, Washington State University; Kim Shultz, regional financial analyst, Quorum Health Resources Region 3, Lafayette, Colorado; and Sher G. Singh, research associate, Center for International Health Services Research and Policy, Washington State University, and visiting professor, City University, Beijing, China
For more information on the concepts in this article, please contact Dr. Coyne at email@example.com.
This article addresses an important topic for healthcare managers and health policymakers. The relationship of hospital size and financial performance continues to be a source of debate in these arenas. This study of hospitals in the state of Washington provides a contribution to each of these areas.
As a director of finance for one of Washington’s largest health systems, I read with interest the five significant findings regarding hospital size and financial performance. The results of this comparison are of use to practitioners in hospitals of all three size categories for both ownership types, given the choice of five efficiency ratios and five cost ratios. Further, the use of regional benchmarks is informative in terms of how Washington hospitals compare.
Implementing the Concepts: Strengths and Weaknesses
The researchers chose the hospital performance indicators well. Financial ratios are powerful indicators of financial performance, and the choice of indicators is supported by the information provided to me as a practitioner. In general, the results are clear in meaning and practical in potential for interpretation. A practitioner can easily review the data and conduct an impromptu analysis of his or her own facility for further study.
The study has a few weaknesses: categorization of like-size hospitals, no patienttype adjustment (inpatient versus outpatient), and no case-mix adjustment. Regarding the first, the practitioner would have preferred to see the small hospitals (critical access hospitals with up to 25 beds) grouped together, although the authors provided additional helpful data about the small hospitals. Cost-based reimbursement for their Medicare and Medicaid patient population in critical access hospitals obviously affects their efficiency and cost results, as suggested by the research here. Regarding the second limitation, the smaller the hospital, the larger the percent of business that comes from outpatient services. This affects margins, capital investments, and occupancy. A simple patient-type adjustment would account for this. In addition, future studies should consider case mix.
References to Current Trends
This article adds to the discussion of the role small rural hospitals play, particularly in the state of Washington and in the Northwest. The efficiency results reported here in terms of occupancy percentage show that small and large not-for-profit hospitals appear to achieve higher efficiency levels. Although patient volume is an ongoing difficulty for small rural hospitals, as documented in an earlier study (Douglas 2005), this study shows current results may differ from past results. Besides the cost and efficiency measures of financial performance, future studies could examine the crucial area of quality of care as discussed in a related article (Douglas 2002).
Douglas, S. 2002. “Quality, Cost, and Critical Access.” Healthcare Financial Management Northwest Outlook (April): 13-14.
Douglas, S. 2005. “Critical Access Hospital Designation and Access to Capital for Rural Hospitals in Washington State.” Master’s thesis, Washington State University-Spokane.
Sean Douglas, CHFP, CPA, director of finance, Providence Health Care, Spokane, Washington
Copyright Health Administration Press May/Jun 2009
Studies; Efficiency; Size of enterprise; Hospital costs; Ownership
Ownership, Washington, Economics, Hospital (major), Efficiency, Organizational(major), Health Facility Size — economics (major)
8320: Health care industry 9130: Experiment/theoretical treatment 9190: United States
Hospital Cost and Efficiency: Do Hospital Size and Ownership Type Really Matter?
Coyne, Joseph S, DrPH; Richards, Michael Thomas; Short, Robert, PhD; Shultz, Kim; Singh, Sher G; Douglas, Sean, CHFP, CPA
Journal of Healthcare Management
163-74; discussion 175-6
Number of pages
Health Administration Press
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Country of publication
Public Health And Safety, Environmental Studies, Health Facilities And Administration, Physical Fitness And Hygiene
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ProQuest document ID
Copyright Health Administration Press May/Jun 2009