The U.S. has the most expensive per capita health care system in the world. As such, one of the main goals of the Affordable Care Act (ACA) is to reduce costs for citizens. Morgen S. Johansen and Ling Zhu examine how private, non-profit, and government-run hospitals have responded to local market competition and the ACA. They find that administrators from public, non-profit, and private hospitals prioritize different aspects of care and costs in the face of market competition and that public hospitals are much more responsive to the ACA reforms

Johansen, Morgen S.

Zhu, Ling

LSE Research Online

blogs.lse.ac.ukhttp://blogs.lse.ac.uk/usappblog/2014/01/30/market-competition-may-not-reduce-costs-or-lead-to-greater-efficiency-in-hospitals/Credit: Wolfman-K (Creative Commons: BY-SA 2.0)Market competition may not reduce costs or lead to greaterefficiency in hospitalsThe U.S. has the most expensive per capita health care system in the world. As such, one of themain goals of the Affordable Care Act (ACA) is to reduce costs for citizens. Morgen S. Johansenand Ling Zhu examine how private, non-profit, and government-run hospitals have responded tolocal market competition and the ACA. They find that administrators from public, non-profit, andprivate hospitals prioritize different aspects of care and costs in the face of market competitionand that public hospitals are much more responsive to the ACA reforms.On March 23, 2010, President Obama signed the Patient Protection and Affordable Care Act(ACA), which marked the most comprehensive national reform of the American health caresystem since the Johnson Administration. One major goal of Obama’s national health care reformis to reduce health care costs for American citizens. The Affordable Care Act is a significant pieceof legislation for American hospitals, because it adds increasing pressure to manage health carecosts under the new law.Cutting costs and making health care services more financially efficient are long-standingchallenges for the U.S. hospital system. The Americanhospital system typifies a recurring trend in publicservice provision in the U.S.—the attempt to deliverservices using a mix of public and privateorganizations. According to the American HospitalAssociation (AHA), there are more than 6,000registered member hospitals. Nearly half of AHAmember hospitals belong to the non-profit sector.Federal, state, and local governments together own25% of AHA hospitals; the remaining 25% of Americanhospitals are private for-profit entities.  Figure 1: Ownership Composition of the AHAMember Hospitals, FY 2010In such a mixed-ownership system,the government pays public, privateand nonprofit hospitals to provideservices to elderly and low-incomecitizens through Medicare andMedicaid programs. Private insuranceproviders cover the medical costs formost working adults and their families.As such, health care services arerarely managed through directgovernment administration. Instead,services are provided through public-private partnerships, privatecontractors and nonprofitorganizations. The rationale of usingthe private and non-profit sectors forservice provision is that theintroduction of market competition inthe provision of services will makethese services cheaper and moreefficient. An argument in favor ofproviding services throughgovernment owned entities is that they are more responsive to the public, via government laws and policy.Yet, as the national health care reform adds new constraints on Medicare and Medicaid payments and imposespressures on cutting costs, the question of whether hospitals in different sectors would effectively adapt to andcomply with the new law remains unsettled. Many rural and smaller hospitals find it challenging to balance theirbudget sheets under the expansion of Medicaid coverage. Although under the ACA, more low-income individualswould be covered through the expansion of Medicaid coverage, states usually do not cover all health care costsfor Medicaid patients. The recent economic downturn, moreover, has amplified local market competition for somehospitals and increased their financial burdens.Hospital administrators in the three sectors respond differently to both local market competition and the newhealth care law. In our recent research, we find public, nonprofit and private hospitals have different economic andpolitical incentives to manage their financial resources and to serve their patients. Facing local marketcompetition, public, nonprofit, and private hospital managers place substantially different priorities on serviceefficiency and cost containment. According to our mail survey of nearly 1,000 American hospital CEOs, about 58%of public hospital managers manage service efficiency with a moderate frequency, while more than half of thenon-profit hospital managers manage service efficiency at a high frequency. Two thirds of non-profit hospitalmanagers see managing per patient cost as a top priority, whereas in both the public and for-profit sectors, thereis a lack of managerial priority on cost containment. Only about 32% of public hospital managers place a very highpriority on managing per patient cost. 25% of the private hospital managers reported that they do not consider perpatient cost as a top management priority.Local market competition does have an influence on how hospital administrators weigh their considerations forefficiency and cost containment. We find that non-profit and private hospitals care most about cost containmentwhen there is relatively low market competition. Moreover, when there is extremely high market competition, as isoften found in major metropolitan areas, these private and nonprofit hospitals care less about cost containmentand place a greater emphasis on improving their hospital facilities, investing in new technology, retaining corepersonnel, and securing their profit margins.Figure 2: Managing Service EfficiencyFigure 3: Priority on Managing PerPatient CostWe also compare how the dependence on government medical reimbursement payments influences hospitals’adaptation to the ACA. Prior to the full implementation of the ACA, we surveyed hospitals managers in all threesectors regarding how much they have adjusted their financial strategies to prepare for national health carereform. We find that hospitals in all three sectors have prepared for the ACA, but at different degrees. A substantialshare of non-profit hospitals (33.24%) and private hospitals (16.05%) only put in a low level of effort to prepare forthe ACA. Public hospital managers, in turn, are more responsive to the ACA reforms. According to our research,as hospitals rely more on government reimbursement payments, they are more likely to adjust their financialstrategies in preparation for the new policy changes. Because of their continuing reliance on public funding, publichospitals are much more responsive to political pressure than private hospitals.Figure 4: Managerial Preparation for National Health Care ReformOur research casts doubt on the often proffered solution of privatization and the introduction of market competitionto improve efficiency and reduce the costs of public services. We find that high market competition is associatedwith a decreased concern among private hospitals about efficiency and costs. Even in a regulated market system,public and non-profit hospitals are not particularly sensitive to market competition. This is not surprising given thatsocial service domains such as health care are challenging areas in which to improve efficiency because thefinancial incentives that the market creates often rely on accurate pricing, and the values of goods and servicesproduced in the health care domain cannot be easily monetized.Managerial reactions to the new policy changes are mixed, with a large share of non-profit and private hospitalsremaining inactive in the wake of the ACA. Increasing service efficiency and reducing health care costs remains astruggle among many American hospitals. Under the reform of the health care system with the ACA, non-profithospitals will be the ones leading the change due to the large proportion of non-profit hospitals in the Americanhealth care system. If we really are to improve health care efficiency and contain health care costs, the solutiondoesn’t seem to be increased market competition. Rather, a political climate that sets incentives for hospitalcompliance will pay the largest dividends through the improvement of non-profit hospital performance in thecountry.This article is based on the paper “Market Competition, Political Constraint, and Managerial Practice in Public,Nonprofit, and Private American Hospitals,” which appeared in the Journal of Public Administration Research andTheory.Please read our comments policy before commenting.     Note:  This article gives the views of the authors, and not the position of USApp– American Politics and Policy, norof the London School of Economics.Shortened URL for this post: http://bit.ly/1aHjC4M_________________________________About the authorsMorgen S. Johansen – University of HawaiiMorgen S. Johansen is an Assistant Professor in the Public Administration Program and PublicPolicy Center at the University of Hawaii. Her research focuses on social equity and justice issues,particularly in health care and education. Ling Zhu – University of HoustonLing Zhu is an Assistant Professor of Political Science at the University of Houston. Her researchinterests include public management, health disparities, social equity in healthcare access, aswell as implementation of public health policies at the state and local level.CC BY-NC-ND 3.0 2014 LSE USAPP

Market competition may not reduce costs or lead to greater efficiency in hospitals

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