Hospital cost and efficiency: do hospital size and ownership type really matter?

The primary research question this study addresses is, do size and ownership type make a difference in the efficiency and cost results of hospitals in Washington State? A further question is, what factors might explain such differences? The data source is the hospital financial data reports Washington hospitals submit to the Washington Department of Health. The sample was restricted to not-for-profit and government-owned hospitals, given that these ownership types are predominant in Washington State, and there are only two investor-owned hospitals. The measures of efficiency and cost represent the generally accepted financial indicators derived from the healthcare financial management literature. Cost and efficiency in these hospitals are analyzed using five efficiency ratios and five cost measures. The results are significant for five of the ten measures studied. Measured by occupancy percentage, small and large not-for-profit hospitals appear to achieve higher efficiency levels than government-owned hospitals do, but the larger hospitals of both ownership types report greater efficiency than that achieved by smaller hospitals. In terms of costs, small, not-for-profit hospitals report comparable costs to those of the largest hospitals, likely because 70 percent of the small not-for-profits are critical access hospitals. These findings deserve further study on a regional or national level. A more scientific study of the efficiency and cost of hospitals by size and ownership type would be important to control for case mix, scope of services, and payer mix. Such studies can generate important findings about the relationship of hospital size and ownership type to efficiency and cost. Conducted on a national level, such studies would provide policymakers with the empirical data they need to make decisions regarding the types of hospitals to encourage or discourage in the future.