Financial Pressure and Competition: Changes in Hospital Efficiency and Cost-Shifting Behavior

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Using data from the American Hospital Association and the Medicare program, the authors analyzed the effects of financial pressure and market competition on changes in several measures of performance of 1,435 acute care hospitals between 1987 and 1989. Over the observation period, the least profitable hospitals constrained their growth in total expenses to half that for the most profitable hospitals (13.3% versus 27.6%) by limiting the growth of their staffs and their total assets. These changes were associated with a reduction in inefficiency of 1.8% (11.2%) compared with a very slight increase in inefficiency for the highest profit group. Similarly, hospitals in highly competitive markets controlled expenses relative to those in the least competitive areas. However, they also experienced slower revenue growth than did less competitive hospitals so that, in relative terms, their profit rates fell. The authors found no evidence to suggest that financial pressures created by either low profits or market competition resulted in hospitals engaging in cost-shifting. The authors conclude that health care reforms or market forces that put financial pressures on hospitals can result in cost-containment and improved efficiency without significant cost-shifting.

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