The Impact of a Competitive Healthcare Environment on Cost and Quality

Abstract

A descriptive longitudinal (1988-1993) case study design, with the Resource Dependence Theory as the conceptual framework, was used to investigate the effect of a competitive health care market on the cost and quality of hospital care. The secluded geographic area in which the three study hospitals were located served to minimize the influence of additional competitors. The Resource Dependence theory emphasizes the adaptation of an organization to changes in the environment or competitive market. Historical data were retrieved from the hospitals, Health Care Investment Analysts, Inc., American Hospital Association Guide, and the State Health Care Council.

In 1988 a Stage One market existed in which there were two Health Maintenance Organizations. A shift to an early Stage Two market occurred in 1991 when five local employers formed a preferred provider organization. That same year one hospital increased the contractual allowance discount by 29.8%. Analysis for all three hospitals revealed a decrease in patient volumes, increase in outpatient revenue, increase in contractual allowance discounts and a consistent improvement in performance and efficiency indicators. Operating indicators such as the ratio of cost to revenue favorably decreased (ranging from $-$16% to $-$25%) and the cost to charge ratio per diagnostic related group (five most frequent) favorably decreased (ranging from $-$10.6% to 27.2%). All three hospitals consistently documented a positive margin at the end of the five fiscal years studied. Findings are consistent with a minimal yet evolving competitive market. The inconclusive quality measures serve to document the inadequacy of longitudinal quality outcome measures in health care.