Financial Performance of Safety-Net Hospitals in a Changing Health Care Environment

Abstract

Safety-net hospitals serving the poor and indigent in inner-cities have received inadequate research attention regarding the determinants of their financial performance in the changing health care environment. We analyze how the 1990-92 financial performance of 275 such hospitals is related to exogenous and endogenous factors such as payer mix, service mix, staffing and ownership. Models of hospital financial performance are developed using operating margin, cost per discharge and revenue per discharge as measures of performance. Stepwise regression is used to test the model with data from the American Hospital Association (AHA) and Health Care Investment Analysts (HCIA). Results suggest that: 1) The profitability of inner-city hospitals appears positively related with technical complexity of care; 2) High interest and low operating surplus may constrain the addition of technically sophisticated services to enhance profitability; 3) There is some evidence that new governmental programs, e.g. Medicaid managed care and Medicaid Diagnosis Related Groups (DRGs), may not have improved operating margins, though Medicaid DRGs appear to have contained costs. Follow-up research is needed on this issue; 4) Given external fiscal realities, internal management strategies for inner-city hospitals require research, e.g. developing appropriate managed care systems and timely expansion of sub-acute services and; 5) Services such as AIDS treatment and community health education represent opportunities to respond to community needs, especially since unit cost of such services will decline with high volume.