Hospital Financial Condition and the Quality of Patient Care

Posted: 8 Jun 2007

See all articles by Gloria Bazzoli

Gloria Bazzoli

Virginia Commonwealth University

Hsueh-Fen Chen

Virginia Commonwealth University

Mei Zhao

University of North Florida

Richard C. Lindrooth

Medical University of South Carolina

Abstract

The US hospital industry experienced intensifying financial pressures in the late 1990s and early 2000s. Private payer efforts to contain payments led to sharp declines in payment-to-cost ratios, and federal balanced budget efforts led Medicare margins to be cut in half. There was also growing concern about deficiencies in hospital quality of care. The Institute of Medicine in 2000 reported that 44,000 to 98,000 hospitalized patients lost their lives annually due to medical errors. Our study examines the interrelationships between these phenomena, assessing how hospital financial condition affects multiple indicators of patient safety and quality of care.

Several studies have examined the effects of hospital financial pressure on patient care. Many focused on the implementation of the Medicare Prospective Payment System or the effects of private sector pressures, such as growing HMO market share. Recently, Encinosa and Bernard (Inquiry 2005) examined the relationship between overall financial performance, as measured by hospital operating margin, and several indicators of patient safety and quality of care. Following their lead, we also focus on the effects of overall hospital financial health, as measured by operating margin and the ratio of cashflow to total revenues. This second financial measure accounts not only for operating income but also non-patient care revenues available to a hospital.

There are several methodological advances we implement beyond existing research. First, we treat hospital quality of care as dynamic in that it is affected not only by an array of contemporaneous factors but also by a hospital's historical context. Second, we allow for feedback effects in that a hospital's quality in one period is expected to affect its future financial performance. Encinosa and Bernard did not allow for this kind of feedback effect, and thus, their findings may be biased because financial performance is not strictly exogenous. We used the General Method of Moments approach of Arellano and Bond (REStud 1991) to estimate our models.

We examined a 1995-2000 longitudinal database with over 1,000 general acute care hospitals in 11 states that participated in the Agency for Healthcare Research and Quality's (AHRQ's) state inpatient database (SID) project: AZ, CA, CO, FL, IA, MA, MD, NJ, NY, WA, and WI. Patient safety and quality measures were constructed from AHRQ Patient Safety Indicator software. The database merged information on: hospital characteristics from the AHA Annual Survey and SID: financial data from Medicare hospital cost reports; community characteristics from the Area Resource File; and HMO data from InterStudy.

Keywords: hospitals; financial condition; quality of care

Suggested Citation

Bazzoli, Gloria and Chen, Hsueh-Fen and Zhao, Mei and Lindrooth, Richard C., Hospital Financial Condition and the Quality of Patient Care. iHEA 2007 6th World Congress: Explorations in Health Economics Paper, Available at SSRN: https://ssrn.com/abstract=991802

Gloria Bazzoli (Contact Author)

Virginia Commonwealth University ( email )

Department of Health Administration
P.O. Box 980203
Richmond, VA 23284
United States

Hsueh-Fen Chen

Virginia Commonwealth University ( email )

1015 Floyd Avenue
Richmond, VA 23284
United States

Mei Zhao

University of North Florida ( email )

4567 St. Johns Bluff Road, South
Jacksonville, FL 32224-2645
United States

Richard C. Lindrooth

Medical University of South Carolina ( email )

19 Hagood Ave., Suite 401
Charleston, SC 29425
United States

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