In Hospital Systems: Is Bigger Really Better?

Hospital system formation has been widely touted as a panacea for decreasing health care operating costs. Despite minimal evidence for improved costs, the number of hospital systems grew from 325 to 427 in the last decade. Nearly 60% of all hospitals are currently enrolled as part of a hospital system.

The idea was that expanding system size and membership would maximize economies of scale, providing lower costs and higher volumes of output with the same fixed inputs. Experts note that with integration and back-office procedures such as billing, supply delivery, and transcription shared across the system, hospitals would reduce redundancy. Hospital systems also attract higher volumes of patients and managed care providers. In turn, this increases bargaining power during negotiations with insurance companies.

Yet, system formation does not necessarily equate to integration. Individual hospital units, especially prior competitors, are less likely to share a common culture when merged. With increasing size, bureaucracy adds layers of complexity leading to inefficient communication and execution. This hampers the ability of hospitals to adapt to market demands, ultimately negating theoretical lower costs.

Given this conflicting evidence, Lawton Robert Burns and colleagues from the University of Pennsylvania reviewed the operating costs of hospital systems between 1998-2010. They found that those systems with the highest amount of centralization had the lowest costs. Hub-and-spoke systems, those that have a main hospital center and supporting surrounding facilities, had the largest decrease in operating costs. Conversely, larger national systems (those with 30 hospitals or more) had the highest rise in costs.

Under the Affordable Care Act, hospital systems are closely tied to the establishment of accountable care organizations (ACOs), yet the verdict on its success is still unknown. The study notes that highly centralized systems are still in the minority—cost-saving, hub-and-spoke models account for only 15% of all hospitals. Without robust integration between , , and inpatient care, the majority of hospital systems are still not poised to lower operating costs.

commentary by Neil Wingkun

Abstract

Hospital system formation has recently accelerated. Executives emphasize scale economies that lower operating costs, a claim unsupported in academic research. Do systems achieve lower costs than freestanding facilities, and, if so, which system types? We test hypotheses about the relationship of cost with membership in systems, larger systems, and centralized and local hub-and-spoke systems. We also test whether these relationships have changed over time. Examining 4,000 U.S. hospitals during 1998 to 2010, we find no evidence that system members exhibit lower costs. However, members of smaller systems are lower cost than larger systems, and hospitals in centralized systems are lower cost than everyone else. There is no evidence that the system’s spatial configuration is associated with cost, although national system hospitals exhibit higher costs. Finally, these results hold over time. We conclude that while systems in general may not be the solution to lower costs, some types of systems are. PMID: 25904540  Burns, LR, et al. MCRR. 2015; 72 (3): 247-72.