Professor Publishes Eight-Year Study on Hospital Earnings from Managed Care Contracts

Contact: Laura J. Williams, 617/638-5432 |

Boston, MA —In the first published study examining hospital earnings from managed care contracts, Gary Young, associate professor of health services at Boston University’s School of Public Health, found that teaching hospitals did not fare as well as community hospitals and that overall, hospitals’ profit margins declined in the late 1990s. The study appears in the June issue of Inquiry.

From 1990 through 1997, the study systematically examined the financials of 1,017 hospitals in Florida with managed care contracts. Towards the end of the study period, Young found that hospitals were as likely to lose money as gain money from HMO contracts.

“Hospitals’ financial status has become a significant public policy issue,” says Young. “Hospital executives say that their institutions are in financial decline because payment levels from public and private payers like HMOs are not on par with ballooning costs of patient care.”

Young and his colleagues studied hospital cost reports from the Florida Agency for Health Care Administration — among the few publicly available sources of information on hospital revenues and discounts for commercial HMOs. The sample consisted of all nonfederal, acute-care general hospitals in Florida. For each hospital, he computed the operating margin for commercial HMO contracts.

Over the eight-year period, acute care hospitals experienced, on average, a more than 250 percent increase in revenue from commercial HMOs as a percentage of total operating revenue. This rise accompanied HMOs increased market penetration in Florida from 11 percent to more than 25 percent. Hospital revenues from Medicare, the largest single source of payment for hospitals, as a percentage of total operating revenues declined slightly, less than one percent during the study period.

Hospital operating margins significantly tightened toward the end of the study period, due to higher hospital price discounts to HMOs. “We found that between 1990 and 1997, median hospital discounts to HMOs increased more than 30 percent faster than median hospital operating costs,” says James Burgess, a professor at Boston University’s School of Public Health who worked with Young on the study. Operating margins declined for hospitals with commercial HMO contracts, while the volume of HMO business spiked. As HMOs have increased their penetration into health care markets and consolidated into large corporate entities, they have secured stronger negotiating positions relative to providers, particularly hospitals.

Results indicate statistically significantly effects for teaching status, size, and setting. Teaching hospitals did not fare as well as community hospitals with their earnings from HMOs. Teaching hospitals’ margins were between 11 and14 percent lower on average than their non-teaching counterparts. Higher operating costs to support educational and research activities resulted in lower operating margins from HMO contracts. Larger hospitals and those in urban markets had higher operating margins.

According to Young, declining margins along the lines of the sample hospitals in Florida in 1997 could eventually erode quality of care and compromise the ability of teaching hospitals to carry out their traditional mission in medical education and research.

“The trends and patterns we observed are consistent with anecdotal information about hospitals financial relationships with HMOs across the nation,” says Young. “Our results from Florida raise issues about the future financial viability of hospitals if they can’t shift the costs of treating HMO patients to other payers and if HMOs continue to expand their market share.”

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