Successful physician-hospital integration in rural areas

During the 1990s hospitals competed to acquire physician practices. Those competitive bidding wars could have pushed the price of practices beyond the value obtained by gaining influence over physicians. This paper examines how hospital location and competition for physician practices affects the profitability of physician-hospital integration in rural areas.

Eight years of data covering 338 rural hospitals are used to test whether the acquisition of physician practices is more successful in more isolated, uncompetitive rural markets than in competitive rural markets. A hospital without a competitor within a 15-mile radius is deemed to operate in an uncompetitive market. Success is measured by shifts in admissions, lengths of stay, and overall profitability following the acquisition of a physician practice.

Hospitals in uncompetitive rural markets that acquired practices showed decreased lengths of stay and increased admissions with no reduction in profitability. Hospitals in more competitive rural markets that acquired practices showed a decrease in profitability.

Integration was a more profitable strategy for isolated rural hospitals than for hospitals with nearby competitors. Although further research is needed to determine if these results are due to the affect of competition on the cost of acquiring and operating practices, isolated rural hospitals should be open to the prospect of acquiring physician practices. Hospitals in competitive markets should be cautious about entering bidding wars for physician practices.