Rural Hospital Ownership: Medical Service Provision, Market Mix, and Spillover Effects

TLDR: In this paper, the authors examined the effects of hospital ownership on the availability of medical services in rural areas and identified two distinct types of ownership effects: (1) the direct effects of a rural hospital's own ownership on medical service offerings and (2) the spillover effects of the market mix of hospital types on a hospital's service offering.

Abstract: The organizational landscape of hospital care in the United States is shifting once again. The Patient Protection and Affordable Care Act (PPACA) includes new regulation of nonprofit hospitals, including community benefit obligations and billing practice reform (PPACA 2010). Moreover, hospital conversions from nonprofit to for-profit ownership are on the rise again (Gold 2010). Since the last spate of conversions in the early 1990s, we have learned a great deal about the effects of hospital ownership in urban settings. However, despite claims that hospitals are the heart of rural health systems (Holmes et al. 2006) and for-profit ownership may harm rural health services (Moscovice and Stensland 2002), researchers have largely studied ownership in the urban context. The marked divergence between rural and urban health care makes it inappropriate to apply findings from one context to the other, and highlights the need for research into the particular effects of ownership on rural hospitals. Differences in urban and rural health care can be seen in insurance status (Lenardson et al. 2009), provider demographics (Reschovsky and Staiti 2005), case mix and government payment structures (Moscovice and Stensland 2002), and the relatively high government hospital market penetration in rural markets (Table 1). For these reasons, as well as the fact that roughly half of all U.S. hospitals are located outside of metropolitan statistical areas (MSAs), we examine the direct and spillover effects of hospital ownership on the availability of medical services in rural areas. Table 1 Hospital Ownership (1988–2005) by Year and Rural Status First, we provide new descriptive information on for-profit and nonprofit market share in rural markets. We also identify systematic differences in the characteristics of geographic areas in which for-profits and nonprofits locate, patterns that are particularly important to consider when analyzing the effects of rural hospital ownership on hospital behavior. Previous studies concluding that rural for-profit hospitals have better controlled labor and other operating costs (McCue 2007) or are otherwise more efficient (Ferrier and Valdmanis 1996) than either nonprofit or government hospitals acknowledge the importance of location. But these studies address neither the variation in population density within nonurban areas nor related selection effects. Second, using regression analysis, we identify two distinct types of ownership effects: (1) the direct effects of a rural hospital's own ownership on medical service offerings and (2) the spillover effects of the market mix of hospital types on a hospital's service offering. Our strongest findings suggest that nonprofit hospitals are more likely than rural for-profit hospitals to offer unprofitable services, many of which are in short supply in rural areas. Nonprofits are also less responsive than for-profits to changes in medical service profitability. Moreover, nonprofit hospitals located in areas with more for-profit competitors act more like for-profit hospitals in terms of service offerings than do nonprofits located in areas with fewer for-profit competitors. It is unclear, however, whether these similarities are because nonprofits must make up for lost revenue due to cream skimming by for-profit hospitals or because the characteristics of those markets favor that type of behavior. Given both the recent increase in hospital conversions and debate at all levels of government regarding whether nonprofit hospitals merit their tax exemptions, these results are both timely and important for understanding the potential effects of nonprofit and tax policy for health policy.