The effect of chain membership on hospital costs

To compare the cost structures of hospitals in multihospital systems and independently owned hospitals.

The American Hospital Association's Annual Survey from 1990 for data on hospital costs and attributes. Area characteristics came from the Area Resource File, and the Medicare case-mix index came from the Health Care Financing Administration. Data on wages are from the Bureau of the Census' State and Metropolitan Area Data Book. The Guide to Hospital Performance from HCIA, Inc. provided data on quality of care.

Separate cost functions were estimated for chain and independent hospitals. Hybrid translog cost functions included measures of outputs, input prices, and hospital and area characteristics. The estimation method accounted for the simultaneous determination of costs and chain membership, and for any nonrandom selection of hospitals into chains. Several economic cost measures were calculated to compare the cost structures of the two types of hospitals.

Data from all sources were merged at the hospital level to form the study sample.

Hospitals in multihospital systems were less costly than independently owned hospitals. Among independent hospitals, for-profits had the highest costs. There were no statistically significant differences in costs by ownership among chain members. Economies of scale were enjoyed in both types of hospitals only at high volumes of output, while economies of scope occurred at all volumes for chain hospitals, but only at low and medium volumes for independent hospitals.

This study provides support for the idea that growth of the multihospital system sector can provide a market solution to the problem of constraining costs. It does not, however, support the property rights theory that proprietary hospitals are more efficient than nonprofit hospitals.