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We examined the differences in the economic performance of 80 matched pairs of investor-owned chain and not-for-profit hospitals in eight states during 1978 and 1980, and considered how their operating strategies might affect their relative success in a more price-conscious market. We found that total charges (adjusted for case mix) and net revenues per case were both significantly higher in the investor-owned chain hospitals, mainly because of higher charges for ancillary services; there were no significant differences between the two groups of hospitals in regard to patient-care costs per case (adjusted for case mix), but the investor-owned hospitals had significantly higher administrative overhead costs; investor-owned hospitals were more profitable; investor-owned hospitals had fewer employees per occupied bed but paid more per employee; investor-owned hospitals had funded more of their capital through debt and had significantly higher capital costs in proportion to their operating costs; and the two groups did not differ in patient mix, as measured by their Medicare case-mix indexes or the proportions of their patients covered by Medicare or Medicaid. We conclude that investor-owned chain hospitals generated higher profits through more aggressive pricing practices rather than operating efficiencies - a result not unexpected in view of past cost-based reimbursement policies. Recent changes in these policies are creating new pressures for cost control and moderation in charges, to which both types of hospitals must adapt. Neither type has a clear-cut advantage in the ability to make the necessary changes.

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We investigated differences among five types of hospitals, defined by ownership (investor-owned or not-for-profit), system affiliation (system-affiliated or freestanding), and government sponsorship on 24 measures of economic performance. Using multivariate analysis of 1980 Medicare cost report and other data from a national sample of 561 hospitals, we found that investor-owned chain hospitals charged significantly more, and were more profitable, than all other types of hospitals except freestanding for-profits; there were no differences in productive efficiency that could be attributed to ownership or affiliation; the investor-owned hospitals had higher debt-to-asset ratios, less-capital-intensive plants, and greater capital costs as a percentage of operating costs than the not-for-profits; and there were no consistent case-mix differences among the hospitals.

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Now entering its third year of implementation, selective contracting for health services in California continues to benefit the Medicaid program and is taking hold in the private sector. The number of hospitals under contract with Medicaid has increased to 274, and the state budget for inpatient services in FY 1984-1985 is projected to increase by only 1%. Operational preferred provider organizations (PPOs) in the state now approximate 50. Hospitals are contracting with private payers at prices averaging 10%-20%, and as high as 40%, below customary charges. PPO premiums are stated to be 10%-20% below indemnity rates. No measurable diminution of quality or access for Medicaid patients has yet been demonstrated. Selective contracting and its attendant competitive incentives have changed provider behavior and continue to dominate state health policy.

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California is the first state to enable its Medicaid program and private insurance firms to negotiate with providers for prices to be paid for health services. Initial findings from a two-year study sponsored by the National Governors' Association indicate few problems with Medicaid contracting. Hospital contracts are widely dispersed at prices highly favorable to the state, there has been little documented dislocation of patients or physicians into a two-tier system, and there is no evidence of reduction in quality of care. State savings are estimated at $165 million for the first year of the program. Selective contracting in the private sector, by contrast, has moved more slowly than anticipated, owing to a number of unforeseen barriers.

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By deciding which medical procedures are eligible for reimbursement, health insurance programs possess the potential to affect significantly technology use and health care spending. Traditionally, insurers have adopted a passive stance and made relatively few negative coverage determinations. However, resistance to rapidly rising costs has created a powerful inducement for third-party payors to become more prudent purchasers of health care services. Consequently, both Medicare and Blue Cross--Blue Shield are considering the implementation of changes that may ultimately result in more restrictive coverage decisions. This article examines the coverage process of Medicare and Blue Cross--Blue Shield and the policy changes that both programs are considering. In addition, it discusses the strengths and drawbacks of four coverage policy options: restricting insurance coverage of unproven procedures, introducing cost-effectiveness criteria, educating physicians and educating consumers.

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A survey of 78 hospitals under contract for at least two years and an in-depth examination of three case studies show that contract management, whether from the not-for-profit or the investor-owned sectors, is producing successful results.

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As the federal government shifted from its traditional roles in health to the payment for personal health care, the relationship between public and private sectors has deteriorated. Today federal and state revenue funds and trusts are the largest purchasers of services from a predominantly private health system. This financing or "gap-filling" role is essential; so too is the purchaser's concern for the costs and prices it must meet. The cost per person for personal health care in 1980 is expected to average $950, triple for the aged. Hospital costs vary considerably and inexplicably among states; California residents, for example, spend 50 percent more per year for hospital care than do state of Washington residents. The failure of each sector to understand the other is potentially damaging to the parties and to patients. First, and most important, differences can and must be moderated through definite changes in the attitudes of the protagonists.

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Token deference to humanism will not get the job done/The goal of humanizing care must be given high priority and be made consistent with other hospital objectives.

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