The changing roles of public hospitals?

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The changing roles of public hospitals?
Shanks, Nancy Hoffman
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xiv, 241 leaves : illustrations ; 28 cm


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Public hospitals -- United States ( lcsh )
Public hospitals ( fast )
United States ( fast )
bibliography ( marcgt )
theses ( marcgt )
non-fiction ( marcgt )


Includes bibliographical references (leaves 212-228).
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Submitted in partial fulfillment of the requirements for the degree, Doctor of Philosophy, Graduate School of Public Affairs.
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School of Public Affairs
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by Nancy Hoffman Shanks.

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Full Text
Nancy Hoffman Shanks
B.A., University of Colorado, 1969
M.S., Drexel University, 1973
A dissertation submitted to the
Faculty of the Graduate School of Public Affairs of the
University of Colorado in partial fulfillment
of the requirements for the degree of
Doctor of Philosophy
Graduate School of Public Affairs

Copyright by Nancy Hoffman Shanks 1988
All Rights Reserved

This dissertation for the Doctor of Philosophy
degree by
Nancy Hoffman Shanks
has been approved for the
Graduate School
of Public Affairs

Shanks, Nancy Hoffman (Ph.D., Public Administration)
The Changing Roles of Public Hospitals?
Dissertation directed by Assistant Professor Eileen
A. Tynan
Public hospitals have as their mission the
provision of a full range of services, access to care
for the poor, provision of emergency and specialized
services, and various other objectives. Recent
changes in the health care industry, efforts to con-
trol health care expenditures, increasing competition
among providers, and other economic and political
changes have made it increasingly difficult for
public hospitals to fulfill those objectives.
This research study was designed to address
urban public hospitals in the 1980's and their sur-
vival strategies. In particular, the study focused
on indigent care, care for AIDS patients, changes in
organizational arrangements, strategic responses to
competition, adequacy of reimbursement, patient
transfer, and future directions of public hospitals.
The study was conducted in two phases. The
first used data from the American Hospital Associa-
tion to assess changes in hospital performance and
other characteristics between 1980 and 1984 to
provide baseline comparisons across the universe of
metropolitan public hospitals. The second phase sur-

veyed a sample of hospitals to obtain information on
status and roles of public hospitals for 1985-1988.
Significant differences in costs, utilization,
service mix, occupancy, and length of stay were found
when comparisons were made by hospital type, loca-
tion, ownership, bed size, and other characteristics.
Major changes in the roles and missions of public
hospitals did not occur. Rather, hospitals coped by
adapting to their environments, determining ways to
compete, restructuring, changing services, and using
creative ways to deal with indigent care, patient
transfers, reimbursement changes, funding cutbacks,
and increasing numbers of AIDS patients. Increased
demand for services took place in large metropolitan
and university hospitals. Small metropolitan hospi-
tals experienced decreasing utilization and had to
struggle to survive.
Public hospitals responded to political and
economic pressures in the same ways as private hospi-
tals. The study suggested that individualized solu-
tions be designed to meet community needs and that
public policy might be better served by using dif-
ferent survival strategies.
Faculty member in charge of dissertation

This dissertation benefited from the input
of many individuals. In particular, I want to ex-
press my gratitude to Eileen Tynan, who has been a
friend and colleague for many years. As chairman of
the dissertation committees. She devoted many hours
critiquing and guiding this research effort. I also
appreciate the feedback and support provided by the
other members of the committee, particularly
Franklin James. I am truly indebted to four in
dividuals who have provided technical support: Jon
Stiles, data processing whiz; Mary Pettigrew,
eagle-eyed reviewer and expert table maker; and
Katherine Gibson and Sandi Haley, computer experts
and word processors extraordinaire. Most impor-
tantly, there are four people who deserve very spe-
cial thanks for providing continual encouragement
and support along the way: my husband, Rick Shanks;
my mother, Bido; and my good friends, Dede Pahl and
Tina Fleishman. Finally, the grant support received
from the University of Colorado at Denver, Office of
Research and Graduate School of Public Affairs was
greatly appreciated.

INTRODUCTION................................... 1
Contextual Environment........................ 4
Rising Health Care Costs.................... 5
Efforts to Contain Health Care Cost......... 5
Changes in Medicaid and Other Programs
for the Poor.............................. 8
Rising Health Insurance Costs and
Increases in the Uninsured Population... 9
Managed Health Care........................ 11
Increasing Competition Among Hospitals.... 12
Study Purpose................................ 15
Organization of the Dissertation............. 18
LITERATURE REVIEW.............................. 21
Organization Theory Literature.............. 22
Studies of Fiscal Stress and Cutback
Management................................. 29
Studies of Public Hospitals.................. 31
Implications of the Public Hospital
Mission.................................. 32
Implications of Political and Economic
Forces................................... 45
Efforts to Change the Public Hospital
Delivery System.......................... 51

Research Questions to be Addressed........... 55
METHODOLOGY.................................... 58
Design of Phase I Analyses................... 58
Design for Phase II of the Study............. 60
Secondary Data Sources....................... 63
AHA Data Tapes............................. 63
AHA Guide.............................. 64
State and Metropolitan Area Data Book..... 65
Data Collection Procedures and Sample
Selection................................. 67
Secondary Data Collection Procedures....... 67
Primary Data Collection Procedures......... 70
Variable Selection........................... 74
AHA Data Tape Variables.................... 74
Metropolitan Area Data..................... 86
State Level Data........................... 87
Hospital Administrative Survey
Variables.............................. 87
Statistical Procedures....................... 91
PHASE I ANALYSIS FINDINGS.................... 94
Analysis of the Independent Variables........ 94
Frequency Distributions.................... 95
Preliminary Analyses....................... 99

Relationships Between the Independent
Variables.................................. 99
Hospital Characteristic Analyses............ 103
Cost Analyses............................ 103
Utilization Analyses...................... 114
Payor Mix Analyses........................ 119
Service Mix Analyses.....................- 124
Management Arrangement Analyses........... 128
Productivity Analyses..................... 128
Regression Analyses......................... 133
Percentage Change in Cost Per Patient
Day..................................... 134
Cost Per Patient Day...................... 137
Percentage Change in Occupancy Rate....... 141
Occupancy Rate........................... 143
PHASE II STUDY FINDINGS....................... 146
Overview of the Purpose of Phase II......... 146
Analysis Findings........................... 148
Organizational Mission.................... 148
Organizational Status..................... 152
Competition............................... 157
Service Mix............................... 159
Provision of Care to the Indigent......... 162

Government and Business Community
Support................................ 169
Occupancy and Case Mix Changes............. 175
AIDS...................................... 179
The Future Role of the Public Hospital.... 184
Regression Analyses.......................... 188
Percent Indigent Hospital Admissions....... 188
Percent AIDS Admissions.................... 190
FINDINGS AND IMPLICATIONS . ............... 194
Summary and Analysis of Phase I Findings.... 194
Summary and Analysis of Phase II Findings... 198
Implications and Recommendations............. 206
Future Research.............................. 209
BIBLIOGRAPHY................................... 212
COVER LETTER............................... 229

3-1 Comparison of Study Sample Hospitals
to the Universe of Public Hospitals
on Selected Key Variables................. 68
3-2 Comparison of Survey Hospitals to
All Metropolitan Hospitals on
Selected Key Variables................... 72
3-3 Comparison of Survey Respondents to
Survey Non-Respondents on Selected
Key Variables............................. 73
3-4 Pearson Correlations for the
Utilization Variables..................... 77
3-5 Pearson Correlations for the Payor
Mix Variables............................. 79
3- 6 Pearson Correlations for the Medical
Education Variables...................... 85
4- 1 Frequency Distribution of Independent
Variables by Hospital Type................ 96
4-2 Correlations Between Independent
Variables................................ 100
4-3 Bed Size by Hospital Type.............. 102
4-4 Cost Per Patient Day by Hospital
Type..................................... 105
4-5 Cost Per Patient Day by Absence
or Presence of Residency Program......... 106
4-6 Cost Per Patient Day by Control
Type..................................... 108
4-7 Cost Per Patient Day by Hospital
Bed Size................................. 109

4-8 Cost Per Patient Day by Region............ Ill
4-9 Percentage Payroll Expenditures by
Hospital Type........................... 113
4-10 Length of Stay by Hospital Type........ 115
4-11 Length of Stay by Region............... 117
4-12 Occupancy Rates by Hospital Type....... 118
4-13 Occupancy Rates by Region.............. 120
4-14 Percentage Medicare Patient Days
by Hospital Type........................ 122
4-15 Percentage Medicaid Patient Days
by Hospital Type........................ 123
4-16 Proportion of Hospitals with
Specialized Units by Year............. 125
4-17 Proportion of Hospitals with
Specialized Services by Year........... 126
4-18 Discharges Per Bed by Hospital Type...... 130
4-19 Staff Per Bed by Hospital Type........... 132
4-20 Stepwise Regression Equation Using
Percentage Change in Cost Per Patient
Day Between 1980 and 1984 as the
Dependent Variable...................... 136
4-21 Fixed Regression Equation Using Cost
Per Patient Day in 1984 as the
Dependent Variable............................ 138
4-22 Stepwise Regression Equation Using
Cost Per Patient Day in 1984 as the
Dependent Variable............................ 140
4-23 Stepwise Regression Equation Using
Percentage Change in Occupancy Rate
Between 1980 and 1984 as the
Dependent Variable...................... 142

4- 24 Stepwise Regression Equation Using
Occupancy Rate in 1984 as the
Dependent Variable...................... 144
5- 1 Services Considered Part of Hospital
Mission by Hospital Type................ 149
5-2 Type of Ownership by Hospital Type......... 154
5-3 Organizational Changes Undertaken
in Last Three Years by Hospital Type.... 156
5-4 Providers That Are Direct Competitors
by Hospital Type........................ 158
5-5 Services Provided Three Years Ago by
Hospital Type........................... 160
5-6 Services Currently Provided by
Hospital Type........................... 161
5-7 Percentage of Indigent Patients
Treated at Public Hospitals............ 164
5-8 Percentage of Indigent Patient
Admissions by Hospital Type............. 164
5-9 Percentage of Indigent Outpatient
Visits by Hospital Type............... 166
5-10 Percentage of Hospital Uncompensated
Charges by Hospital Type................ 168
5-11 changes by Local Government in
Last Three Years by Hospital Type....... 171
5-12 Local Business Activities in Last
Three Years by Hospital Type............ 172
5-13 Change in Occupancy Rates over
Last Three Years by Hospital Type....... 176
5-14 Change in Case Mix Over Last Three
Years by Hospital Type.................. 178
5-15 AIDS Seen as Significant Problem
in Community Hospital Type.............. 181

5-16 AIDS Seen as Significant Problem
for Hospital by Hospital Type............ 183
5-17 Percentage of AIDS Patients Treated
by the Hospital.......................... 185
5-18 Stepwise Regression Equation Using
Percentage Indigent Hospital
Admissions in 1987 as the Dependent
Variable....................................... 189
5-19 Stepwise Regression Equation Using
Percentage of AIDS Patients Receiving
Care in Survey Hospitals in 1987 as
the Dependent Variable................... 191

2-1 Framework for Studying Strategic
Response and Performance of Public

The dilemma confronting public hospitals
today is best summed up by Isaacs, Lichter and
Lipschultz (1982, p. xi): "The paradox for urban
public hospitals is that the same economic and
political forces that threaten their continued
viability also generate increased demand for their
services." There are a host of such economic and
political forces that have had significant impacts on
public hospitals during the 1980's. This disserta-
tion research seeks to understand how successfully
public hospitals have dealt with issues such as
health care cost containment, competition, managed
care, indigent care, care to AIDS patients, and local
tax limitations. It is also designed to address
which survival strategies have worked and which have
not, and to assess future directions that public
hospitals might take.
Traditionally, public hospitals have served
multiple roles in their communities. The Commission
on Public-General Hospitals (1978) identified the

following reasons for maintaining and improving
public hospitals:
. They represent major, established health serv-
ice capacity by virtue of the sheer magnitude
of their facilities and services.
. They make available important services that
frequently are not provided by other hospitals
(such as emergency and trauma care).
. They are an indispensable resource in the
training of physicians and other health care
- They continue to be a major resource for
breaking down barriers to care (for example,
by providing access to health care for the
poor, the uninsured, the AIDS patient, etc.).
_ They are designed to respond to government-
mandated policies and programs (such as vac-
cination programs).
The Commission's report, which was written in
a period of intense escalation of health care costs,
recognized the unique and valuable role played by the
public hospital and recommended increased support for
hospitals that serve the poor, a greater federal
presence in sharing the burden of providing care to

the poor, and reform of the third-party payment sys-
tem to provide financing for that care.
In the years since the Commission's report,
the number of public hospitals has diminished rather
than increased. In 1978 there were 90 public hospi-
tals in the 100 largest cities in the United States
(Commission on Public-General Hospitals, 1978). By
1982 that number had been reduced to 72 (Feder and
Hadley, 1986). This change represents a 20 percent
reduction in the number of urban public hospitals
over that four year period.
During that same time frame, the number of
other types of short-term general and other special
hospitals operated by state and local governments
declined as well, but at a lesser rate of 4 percent
(AHA, 1986). While the Commission on Public-General
Hospital's goal was to improve the status of public
hospitals, these data suggest a situation of steady
decline in the number of public hospitals over time.
This trend has continued throughout the rest of this
decade. Additionally, very little has taken place in
the last 10 years to implement the Commission's
recommendations or to improve the situation for

public hospitals. If anything, the situation has
gotten worse.
One might speculate that the reduction in the
number of hospitals has come in response to changing
demands on the health care system, declining need for
the services provided by these institutions, or reas-
sessment of mission by public providers. While many
of the generic goals of public hospitals have indeed
been met, such as providing mandated federal programs
or specialized types of care, as has been pointed out
by Dunham, Morone and White (1982), equity and access
to health care continue to be difficult for many
individuals in our society.
Contextual Environment
Many changes have occurred in the hospital
industry during the last decade, which have hobbled
public hospitals' efforts to survive. These are dis-
cussed briefly to provide an overview of the contex-
tual environment in which public hospitals are

Rising Health Care Costs
During the 1970's and 1980's national health
expenditures rose at a much faster rate than infla-
tion. By 1986, health care spending in the United
States had reached $458.2 billion, with health care
alone consuming 10.9 percent of GNP (Health Care
Financing Administration, 1987). Public funds
provided 41.4 percent of that spending. State and
local government expenditures for hospital care rose
from $10.1 billion in 1970 to $55.0 billion in 1986.
The continual upward spiral in health care expendi-
tures has led payors to try to constrain health care
spending, particularly hospital spending.
Efforts to Contain Health care Cost
A host of health care cost containment in-
itiatives have been developed and implemented by
governments, insurers, and purchasers in an effort to
moderate cost increases (Yondorf, Shanks and Pierce,
1985). A primary area of focus of several initiative
has been the modification of reimbursement
One major reimbursement change came about
when the federal government implemented its diagnosis

related group (DRG) methodology for reimbursing
hospital costs under Medicare. This approach
provided a prospectively determined payment rate for
individual diagnostic cases. Iglehart (1986) pointed
out that "the government designed Medicare's prospec-
tive payment system . for two essential reasons:
to compel hospitals to operate with a higher degree
of efficiency and to establish Medicare's annual
level of spending for hospitals in advance, thus
capping a budget that had proved to be uncontroll-
able ..."
A myriad of state cost containment programs
also have emerged. These range from case management
programs designed to control utilization to the adop-
tion of the DRG reimbursement methodology by state
Medicaid programs to full-scale hospital rate setting
It is not clear whether these cost contain-
ment efforts have resulted in expected outcomes.
Early evidence from the DRG program has suggested
that DRGs and other cost containment mechanisms will
squeeze some of the fat out of the hospital sector.
The impacts, however, appear to be mixed (Guterman et
al, 1988). On the one hand, some hospitals have

reaped windfall profits during the initial period of
conversion from a cost-based to a DRG-based reim-
bursement methodology (Feder, Hadley, and Zuckerman,
1987). On the other hand, smaller hospitals with few
Medicare admissions have experienced severe cuts in
reimbursement. While recent evidence has suggested
that hospital spending has been slowed, total health
care spending has not been (Feder, Hadley, and Zuck-
erman, 1987) .
The overall implications of this type of
policy are several fold. First, by focusing on con-
trolling inpatient hospital costs, the health care
industry is continuing to experience major escalation
in the use of non-inpatient services and expenditures
associated with those services. Second, with less
fat in the system it has become increasingly dif-
ficult for hospitals to continue to subsidize charity
care with revenues from private pay patients. How
public hospitals have dealt with these pressures is
not clear. One anticipated outcome is that private
hospitals, being less able to continue to provide
charity care, will "dump" those without ability to

pay on the public providers. Public hospitals may
also be taking steps to limit access to care (Fine,
et al, 1983).
Changes in Medicaid and Other Programs for the Poor
Federal, state and local governments have
sometimes responded to the rise in health care spend-
ing by changing the eligibility criteria for certain
programs. Cuts in Medicaid program funding and
changes in the Aid to Families with Dependent
Children (AFDC) program have resulted in a population
of eligible Medicaid recipients that has remained
relatively constant, while the population of those
living in poverty has increased (Feder and Hadley,
1986). Although Medicaid was initially enacted to
provide access to care for all of the poor, over time
its emphasis has shifted to providing mainly long-
term nursing home care for the elderly poor.
Similarly, some states such as California
also have cut state-funded programs for the medically
indigent and thus, have reduced the numbers of low
income people covered by public programs. These
changes in public insurance and service delivery
programs have created problems for the health care

system as a whole and have added to the problems of
public hospitals by leaving many poor people with no
other alternative means of obtaining needed health
care (Cohodes, 1986).
Rising Health Insurance Costs and Increases in the
Uninsured Population
Private health insurance coverage has become
increasingly expensive for businesses and consumers.
Individuals employed by large corporations benefit
from the group purchasing power that exists within
their organizations. People who are self-employed,
employed by small businesses, or employed in certain
industries often find it cost prohibitive to purchase
adequate health insurance coverage. Increasingly,
young adults are going without insurance coverage un-
der the false assumption that they are young, heal-
thy, and will always remain so.
Recent estimates indicate that in 1980 ap-
proximately 26.0 million people in the U.S. had no
health insurance or inadequate health insurance
coverage (Wilensky, 1988). The size of the uninsured
population has risen steadily in recent years. While
different survey and population estimates vary, it
appears that the uninsured population had increased

to between 31.8 and 37.0 million by 1986 (Wilensky,
1988). One outcome of this trend is that more people
are likely to fall into what is known as the medi-
cally indigent population, i.e. "those who are unable
to afford needed health care because of poverty, lack
of insurance, or inadequate insurance coverage"
(Colorado Task Force on the Medically Indigent,
1984) .
The medically indigent population has come to
be comprised not only of those who have been removed
from the public welfare rolls and are no longer
eligible for health care coverage under public
programs, but also of those who cannot afford to pur-
chase adequate health insurance coverage (Feder and
Hadley, 1986). The medical indigency problem is cur-
rently being further compounded by the increasing
prevalence of AIDS, since AIDS patients typically
have little or no insurance coverage and seek care in
public hospitals.
While some have advocated universal respon-
sibility for indigent care (Tresnowski, 1984), be-
cause of their inability to pay, the medically in-
digent population tend to be one of the primary user
groups of public hospitals. Increases in the medi-

cally indigent population place increasing burdens on
public hospitals, since in fulfilling their missions,
public hospitals have traditionally provided access
to care for this group.
Managed Health Care
Another group of recent initiatives, which
have come about in part in response to cost contain-
ment efforts but also in response to the demand for
more appropriate utilization of health care services,
have emphasized a variety of approaches to better
manage patient care. These efforts involve insurers,
business purchasers, government, and providers and
are intended to provide incentives to consumers to
access and utilize the health care system in more ap-
propriate and cost-effective ways. Managed care
programs focus on linking patients to primary care
practitioners who can act as gatekeepers to the
health care system, can prevent unnecessary use of
specialists and other types of providers, can refer
patients for care in outpatient settings whenever
possible, and can encourage patients to access the
system in the early stages of an acute episode of

illness rather than waiting for it to become an emer-
The impact of managed care on public hospi-
tals is not clear. What is certain is that large
numbers of health care consumers are being locked
into managed care systems through insurance programs.
If public hospitals develop such programs, they- may
be able to bring paying customers into the public
hospitals and will be able to triage those with less
ability to pay to the most appropriate type of care,
which should result in utilizing the system in a more
cost-effective manner. If public hospitals do not
participate in managed care programs, however, they
may experience a siphoning off of paying clients who
are enrolled in other managed care programs. And
yet, the public hospital will continue to bear the
brunt of providing care to those without ability to
Increasing Competition Among Hospitals
Many have, in the past, advocated movement to
a more market-driven health care system (Schramm,
1984). Changes in the health care system are now
forcing hospitals to compete directly with each other

and with non-hospital providers. The increased
availability of new service alternatives (such as
outpatient surgery centers, women's health care
units, or ambulatory care centers), the increased
penetration of health maintenance organizations
(HMOs), preferred provider organizations (PPOs), and
other forms of prepaid health care providers; the
movement toward home and non-institutional care; the
development of competitive bidding among providers;
and the new technologies that allow services to be
rendered in less costly ways all have placed new
pressures on hospitals in general.
The primary outcomes of these changes include
decreased acute care hospital utilization, a shift to
utilization of outpatient services, and a prolifera-
tion of new and different types of service alterna-
tives. In response, the hospital industry has taken
major steps to diversify, to add new types of serv-
ices and products, to develop centers of excellence,
to better utilize existing capacity, to restructure
relationships with other providers, to add amenities,
and/or to make a host of other changes in their ef-
forts to be more competitive.

It is not clear how well public hospitals
have been able to adapt to this changing competitive
environment or whether excess hospital capacity has
led public hospitals to go out of business. What is
clear is that non-public hospitals are not clamoring
for the opportunity to care for those with little or
no ability to pay and that a competitive environment
does not provide incentives to continue to provide
charity care.
In sum, massive changes in the health care
industry have occurred in the last decade. These
changes, coupled with advances in medical technology,
changing demographic patterns, changes in local
economies, and other environmental factors have
forced all hospitals to reevaluate how they do busi-
ness. Since these forces are likely to continue to
exert pressure on the entire hospital industry and to
make it even more competitive, public hospitals may
become increasingly vulnerable, may need to con-
tinually justify their existence and prove their
value to their communities, and may find it increas-
ingly difficult to survive.

Study Purpose
This study was intended to explore how public
hospitals have responded and adapted to the industry
pressures they currently confront, while con-
comitantly coping with the fiscal stress of state and
local government and the increasing pressures to
serve the poor and other underserved populations.
The primary objectives of this study were:
(1) to assess how public hospitals have adapted
and evolved over time,
(2) to understand the changes in public hospitals'
mission and status,
(3) to determine how current trends in health care
financing, managed care, cost containment, and
competition are affecting public providers,
(4) to evaluate how public hospitals are dealing
with the difficult problems of providing care
to AIDS patients and the medically indigent,
(5) to get a better understanding of where public
hospitals are headed in the future.
The study focuses on public hospitals located
in metropolitan areas. This group of hospitals is

distinctly different from the vast majority of public
hospitals that exist in rural areas. The decision to
emphasize solely the metropolitan public hospitals
was based on the following: (1) metropolitan hospi-
tals serve a much larger and diverse population than
rural public hospitals, (2) urban public hospitals
are confronting much larger populations of indigent
and AIDS patients and are, therefore, dealing with a
different set of issues than those confronting rural
providers, and (3) while metropolitan public hospi-
tals represented approximately 31.0% of the total
number of public hospitals in the country, they ac-
counted for 62.5% of total public hospital beds and
77.9% of total public hospital expenditures in 1984.
Thus, by emphasizing this subset of the public hospi-
tals, the study has addressed a major segment of the
public hospital problem.
Within the population of urban public hospi-
tals included in the study there are three major
sub-categories of providers. These include public
hospitals located in large metropolitan areas, those
located in small metropolitan areas, and university
hospitals. The study examines the differences in
these groups with respect to the issues listed above.

For example, it is anticipated that large
metropolitan hospitals will serve larger percentages
of indigent patients than small metropolitan hospi-
The study was conducted in two phases. Each
phase focused on a different set of issues and util-
ized a different methodology. Phase I involved a .
retrospective analysis of public hospitals using ex-
tant hospital survey data from the American Hospital
Association (AHA). The purpose of that phase was to
investigate changes in ownership, management, teach-
ing status, payor mix, utilization, service mix, and
other characteristics of public hospitals. The data
for Phase I were drawn from the 1980 and 1984
American Hospital Association Annual Surveys of
Hospitals. These sources were used to conduct
baseline data analyses that assessed the evolution of
public hospitals during the current decade.
Phase II involved a primary data collection
survey of public hospitals and was designed to obtain
information on a variety of topics. These included:
the missions of public hospitals; the impacts of
recent cost containment efforts, fiscal cutbacks, and
competition in the community; the extent to which in-

digent care was a problem for public hospitals; if
and how public hospitals were coping with AIDS; what
changes had taken place in the services offered by
the study hospitals; what utilization and case mix
changes had occurred; and what changes the survey
respondents anticipated would take place in the fu-
ture. The survey was intended to provide more cur-
rent data on the status of public hospitals as of
1988 and to assess changes that have occurred since
In combination, the two study phases were
conducted to enhance our understanding and knowledge
of public hospitals, the roles they serve in our
society, and how successfully they have coped during
the recent turmoil in the health care industry. The
implications of the study for metropolitan public
hospitals and for local and state public policy are
also examined.
Organization of the Dissertation
This dissertation is comprised of five addi-
tional chapters. Chapter II provides a review of the
relevant and important literature that was pertinent
to the conduct of this project. As such it discusses

the organization theory literature relating to adap-
tation and organizational change, the fiscal stress
literature of public administration, and prior
studies of public hospitals.
The study methodology is described in Chapter
III. The designs of both study phases, sampling pro-
cedures, data sources, variable selection, statisti-
cal tests applied, and other methodological issues
are addressed in this chapter.
Chapter IV presents the findings of the
analyses conducted during Phase I of the project.
These results focus on the status of public hospitals
in the two years 1980 and 1984, assess the percentage
changes that have taken place during that five year
period, and address differences in various hospital
characteristics in terms of a set of independent
The results of the primary data collection
effort, Phase II, are provided in Chapter V. The key
findings focus on changes in the mission and status
of public hospitals, responses to industry trends,
management of the AIDS and indigent care problems,
changes in the performance of public hospitals, and
the future directions of public providers.

The final chapter addresses the study's con-
clusions, recommendations, and implications. These
are presented from an individual hospital perspective
to illustrate potential successful strategies that
other public hospitals have used and from a public
policy perspective in order to provide greater under-
standing of the problems faced by public hospitals
and to suggest if and how public policy might be
shaped to help preserve the roles that public hospi-
tals play in our society.

The significance of this dissertation
research and the underlying rationale for its conduct
arise from the work of others in three areas of
study. First, selected organizational theory is
presented to describe the conceptual framework within
whi: i this study was carried out, particularly with
res ict to understanding how complex organizations
ada? in times of rapid change and high stress.
Seer ad, part of the public administration literature
was reviewed to get a better understanding of how
public organizations in general respond in times of
fiscal stress and cutback management. Finally, the
literature relating to public hospitals was evaluated
in order to place this project within the context of
other work that has been done on this health care
topic. The remainder of this chapter provides an
overview of the literature in these three areas.


Organization Theory Literature
In trying to understand how complex organiza-
tions behave, how they respond to external forces,
and how they adapt strategically, this study drew
upon a small subset of the literature in the field of
organizational theory. The first part of this sec-
tion addresses theories of complex organizational be-
havior in general, while the latter part focuses
specifically on the behavior of hospitals.
Among the numerous theories of organizational
behavior, Thompson (1967) conceptualized what has now
come to be considered a classic framework for assess-
ing organizations using the whole organization as the
unit of analysis and stressing the need for under-
standing how both internal and external factors im-
pact upon the behavior of organizations. The basis
for Thompson's model of organizational behavior is
the concept of the open system, where it is proposed
that organizations function in an interactive mode
with their environments. Organizations are depicted
as having three levels of functioning, including a
managerial level that coordinates an internal, more
technical level within an organization and an in-

stitutional level that is conceived of as the level
at which organizations relate to their external en-
vironments. The strategic management of these
levels, the management of contingencies, the capacity
of organizations to deal with uncertainty, and the
control over organizational domain are seen by
Thompson as key to understanding how organizations
Organizations have two options available to
them; they can adapt and survive over the long term
or the >: can be selected out and fail. Some authors,
such e-:.; Aldrich (1979) ; Hannan and Freeman (1978) ;
and Fireman (1978), have suggested that environmental
factors are the dominant influences that shape or-
ganizational performance and cause organizations to
be selected out. While external forces clearly are
important to organizations, as has been pointed out
by Thompson and others, they are not the sole reason
for survival or selection. This point has been made
by Pfeffer and Salancik (1978). Although they too
favor emphasizing the external control of organiza-
tion, they suggest that "survival of the organization
is partially explained by the ability to cope with
environmental contingencies; negotiating exchanges to

ensure the continuation of needed resources is the
focus of much organizational action" (Pfeffer and
Salancik, 1978, p.258).
As discussed previously, the number of en-
vironmental contingencies that hospitals are cur-
rently dealing with are multiple. In addition, other
factors inherent to the hospitals that influence how
they respond to such contingencies, such as organiza-
tional mission, must be accounted for as well. Draw-
ing upon the work of authors cited above, as well as
Meyer (1978), it is the intent of this study to ex-
amine how public hospital organizations cope with the
variety of influences both internal and external, and
to assess how well they have been able to adapt
A number of authors have addressed the issue
of strategic adaptation generally, e.g. Snow and
Hambrick (1980) and for health care organizations
specifically (Cook et al, 1983, and Kimberly and
Zajac, 1985). All have emphasized the need for
evaluating the interrelationships between internal
and external factors. Cook et al (1983) utilized
Thompson's model to develop a framework for assessing
how hospitals have responded strategically to exter-

nal regulatory actions. That model was modified by
Shorten, Morrison, and Robbins (1985) to provide a
more generic framework for studying strategy making
and strategic response in all types of health care
The Shortell-Morrison-Robbins model was
selected to provide a framework for conducting this
evaluation of strategic response and performance of
public hospitals. The model, with a few of this
author's own modifications, is presented in Figure
2-1. It recognizes the importance of environmental
and internal organizational factors as being related
to organizational performance. Each of the key com-
ponents shown in the figure is discussed briefly
On the left hand side of Figure 2-1 are the
environmental factors to be accounted for; these in-
clude regulatory/reimbursement, competitive and
socioeconomic/demographic characteristics.
Examples of regulatory factors include strin-
gency or restrictiveness of programs, such as
Medicaid, or changes in reimbursement methods, such
as conversion to a case-mix-based approach under
Medicare. Competitive factors focus on competition

FIGURE 2-1: Framework for Studying Strategic Response and Performance of
Public Hospitals.
SOURCE: Adapted from Shorten, Morrison, and Robbins (1985).

among various types of health care providers, while
socioeconomic and demographic factors can be measured
by income and other community characteristics.
The middle column of the figure presents the
organizational strategic response factors and the or-
ganizational structural factors that may need to be
considered in developing strategic responses. The
strategic response factors include specific types of
actions that an organization might take. These could
be made at the managerial level and involve, for ex-
ample an internal corporate reorganization; at the
technical level and focus on diversifying into new
types of services and programs? or at the institu-
tional level and involve acquisitions, mergers, joint
ventures and the like. The lower box in the middle
column pertains to what Shorten, Morrison and Rob-
bins (1985) refer to as modifying factors. These are
organizational structural characteristics and include
ownership, membership in a multi-hospital system,
size, location, and other organizational characteris-
Finally, on the right hand side of the figure
are the organizational performance characteristics.

These include factors such as organizational growth,
access to care, and cost containment, among others.
As is evident from review of the directional
arrows in the figure, the various sets of factors are
conceptualized as influencing each other in different
ways. Environmental factors influence organizational
performance both directly and through strategic
response factors. Organizational structural factors
also affect strategic responses and may, in turn, be
modified themselves by strategic response.
The approaches discussed here suggest the use
of both quantitative and qualitative resec :ch methods
in evaluating organizations. The researc] undertaken
here has benefited from the work of Daft (1983), Kirk
and Miller (1986), and Glaser and Strauss (1967) in
this regard.
In sum, the approach discussed here provides
an overall framework for the design of this study.
It is used to guide variable measurement decisions
and the implementation of the necessary data collec-
tion efforts that are described in Chapter ill, as
well as the interpretation of the analyses presented
in Chapters IV and V. Before moving on to those

issues, however, it is useful to review how this
study relates to other studies of public organiza
tions and public hospitals.
Studies of Fiscal Stress and Cutback Management
The public management strategies of the
1960's and early 1970's were predicated upon growth.
The late 1970's and early 1980's brought severe
decline, which in turn forced local governments into
Public administrators have been hard pressed
to manage public institutions due to increasing
levels of fiscal stress. When that stress has become
too severe, government officials have been forced to
implement various approaches to cutback management.
For the purposes of this study, fiscal stress has
been defined as the gap between people's needs and
expectations and the inability of the economy to meet
those needs without raising taxes (Levine, 1980).
Studies of fiscal stress indicate that
governments operate along a continuum of scarcity
(Schick, 1980). When they reach the point of total
scarcity, they are forced to resort to a cutback
management-retrenchment mode (Levine, 1978, 1979,

1980? Levine and Rubin, 1980; and Levine, Rubin and
Wolohojian, 1981). Fiscal stress has been measured
in studies of public universities in terms of
resource allocation, flexibility in using resources
and ability to generate revenues (Rubin, 1979).
Similar approaches also have been applied in inves-
tigations of city management (Rubin, 1982).
Studies in the hospital sector have tried to
account for the fiscal stress of local governments by
including direct measures of revenue, borrowing power
or incurred debt such as tax capacity, local govern-
ment bond ratings, and the levels of local government
debt (Shonick, 1979) or per capita municipal hospital
expenditures (Craig and Koleda, 1978). Other in-
dicators that reflect responses to fiscal stress and
the implementation of cutback management strategies
included changing fee/charge schedules, establishing
hiring freezes, approving across the board budget
cuts, and imposing other sorts of spending limita-
tions on public institutions (Levine, 1978? 1979).
In public hospitals where operating problems
have been compounded by the upward spiral of rising
health care costs, cutbacks in local funding have
made survival increasingly difficult. To account for

this in implementing the model presented earlier,
this study has defined measures of both fiscal stress
and cutback management among the socioeconomic and
demographic variables developed for use in the
Studies of Public Hospitals
As mentioned in Chapter I, the American
health care industry has experienced extensive
changes over the last decade and a half. Many of the
problems that health care experts thought could
easily be solved a decade ago have, in many cases,
only gotten worse. Efforts have therefore been ongo-
ing to understand the problems of the health care in-
dustry and to improve the way the system delivers
care. This study seeks to contribute to that litera-
ture by building on those earlier studies.
The system of public hospitals is par-
ticularly vulnerable to demands for reform, stream-
lining and change (Brown, 1981; and Brown, 1983).
This is in part a function of being a public agency,
in part a function of the mission and objectives that
public hospitals have established, and in part a
function of external pressures. Consequently, it is

not surprising that people have questioned the need
for public hospitals, whether other types of hospi-
tals could not provide public hospital services in
more cost-effective ways, and whether public hospi-
tals can indeed continue to meet the needs of their
local communities. The remainder of this section
focuses on the studies that have investigated these
issues and the implications for this dissertation
Implications of the Public Hospital Mission
The scrutiny of public hospitals stems, in
part, from the mission that public institutions have
established for themselves. As pointed out by the
Commission on Public-General Hospitals (1978),
Isaacs, Lichter and Lipschultz (1982), and the Na-
tional Association of Public Hospitals (1982), public
hospitals have been committed to providing access to
needed health care for all patients without regard to
economic considerations. Public hospitals have
traditionally offered specialized services that other
institutions have deemed not to be cost-effective,
and public hospitals have been active in training

health care professionals. By continuing to maintain
these traditional roles, public hospitals have tended
to create a number of problems for themselves. The
following examples serve to illustrate these points.
Specialized services. The provision of spe-
cialized types of services has been a role that
public hospitals traditionally have undertaken. One
type of service commonly available at public hospi-
tals is emergency care. A recent study of DRG emer-
gency room admissions found that the cost per case
was significantly greater for both Medicare and non-
Medicare patients admitted through the ER than for
patients not admitted through the ER (Munoz et al,
1986). One implication of this finding is that in-
stitutions that are major providers of emergency care
are likely to be more vulnerable under a DRG type of
reimbursement methodology. As more payors, such as
state Medicaid programs and Blue Cross plans, move to
implement DRG systems, public hospitals may find
themselves at greater financial risk.
Other studies also have shown that the case
mix of public hospitals differs from private hospi-
tals. Shwartz, Merrill, and Blake (1984) found sig-

nificant differences in length of stay over a wide
variety of DRGs when public and non-public hospitals
were compared. Public hospitals have been shown to
have higher percentages of obstetric and psychiatric
patients and more victims of accident, injury and
violence (Coffey, 1983).
This dissertation research project assesses
the continued commitment of public hospitals to
provide specialized services. It also addresses
changes in service mix, case mix proxies, as well as
indicators of the adequacy of the DRG payment
Access to care for the poor. Another
problematic area for public hospitals is clearly
their commitment to providing access to health care
for the indigent and medically indigent (Boyer,
1983). Many studies have shown that minority groups,
the unemployed, and the poor have more limited access
to health care than the rest of population (Robert
Wood Johnson Foundation, 1983). A follow-up study by
the Robert Wood Johnson Foundation (1986) demon-
strated that access to care worsened during the
early 1980's, particularly for some minority groups.

Another recent study also confirms that certain
population groups are at greater risk by not receiv-
ing necessary preventive care, for example, women
foregoing prenatal care during the first trimester of
pregnancy (Louis Harris and Associates, Inc., 1988).
The public hospital system has demonstrated that it
is, to some extent, capable of increasing efficiency
in order to absorb increasing numbers of indigent
patients (Gelder-Kogan, 1985).
The issue of whether local governments are
obligated to provide access to care for the poor in-
volves moral, ethical, and legal considerations as
well as economic ones (Kinzer, 1984). Some have
suggested care should be provided only for the
'deserving poor' (Sher, 1983), while a recent
Presidential Commission noted that there "is evidence
of a societal consensus that everyone should have ac-
cess to some level of care" (President's Commission
for the Study of Ethical Problems in Medicine and
Biomedical and Behavioral Research, 1983). From a
legal perspective, the existence of either a histori-
cal precedent for providing care or a legislative
mandate to do so serves the purpose of establishing
legal responsibility to provide care to the poor.

Although there may be state mandates for the provi-
sion of such care, as Brown and Cousineau (1984) ob-
served, ensuring that local governments fulfill that
mandate can be difficult. Additionally, Hill-Burton
obligations whereby hospitals were required to
provide certain amounts of charity care in exchange
for receipt of federal capital expenditure funds also
provided incentives for facilities to provide care to
the poor (Dowell, 1987). However, many of these
agreements were never well-monitored and the periods
of obligation have now run out.
The acceptance of responsibility for provid-
ing care to the poor creates significant challenges
in service delivery (Yancey, 1987) and brings with it
a series of problems, including: increasing levels of
uncompensated care, dependence on government sub-
sidies, a poor public image in some cases, vul-
nerability to recession and cutbacks, and a
deteriorating physical plant (Shanks and Tynan,
1984). As Friedman (1987a, p. 1437) observed, ful-
filling this and other areas of mission of public
hospitals is "doing what everyone wants done, but few
others wish to do." Thus, having made a commitment,
public hospitals have proceeded to provide massive

amounts of care to the poor. The National Associa-
tion of Public Hospitals (1983c) found that its 24
member institutions had uncompensated care totaling
approximately $435 million for inpatient care and
$249 million for outpatient and emergency care in
Many studies have shown that public hospitals
provide much higher percentages of care to the poor
(Hadley and Feder, 1984; Hadley, Mullner, and Feder,
1982; Rogers et al, 1985; and Feder, Hadley and
Mullner,1984a and 1984b) and thus incur higher per-
centages of uncompensated care than non-public hospi-
tals (Coffey, 1983; Shanks, 1984; Mulstein, 1984; and
Ohsfeldt, 1985). More recently, Feder and Hadley
(1986) found that private hospitals have become in-
creasingly less willing to provide care to the poor.
One outcome of this change in perspective on
the part of private hospitals is the growing problem
of patient transfers or what is frequently referred
to in the literature as "patient dumping." Many of
the recent reports are anecdotal, such as the recent
Wall Street Journal article on hospitals dumping the
poor (Ansberry, 1988). Friedman (1982) suggests
that, while patient dumping of emergency cases is il-

legal in all states and may violate hospital Hill-
Burton agreements, the practice was relatively common
even in the early 1980's. As the decade has
progressed, the dumping problem appears to have wor-
sened. Greene (1987) suggests that in some cases
transferred indigent patients are bumping private-pay
customers out of public hospitals. Fackelmann (1988,
p.l) states "many attorneys believe dumping is
widespread and is overwhelming the nation's public
hospital system."
Two recent studies of clinical outcomes after
transfer found that such transfers were in some cases
questionable in terms of need because many patients
were released from the hospital emergency room (Reed,
Cawley and Anderson, 1986). On the other hand,
transfers were found to be life-threatening to the
patients studied by Himmelstein et al (1984). That
study also found that most transfers were young,
uninsured males from minority groups and thus con-
cluded that "transfer is a common and potentially
dangerous medical intervention which appears to rein-
force racial and class inequalities of access to
medical care" (Himmelstein et al, 1984, p.494).

In general, the prevalence of patient dumping
has led many to suggest that hospitals should develop
transfer policies. The extent to which public hospi-
tals have taken the lead in this area is not known.
Some states such as Texas and California have
recently enacted tougher anti-dumping laws. Court
cases involving patient dumping also have occurred.
In Florida, a for-profit hospital sued a public
hospital that had refused admission to a transferred
pat ent. The court ruled in the public hospital's
favrr, indicating the public hospital had discretion-
ary powers that enabled it to decide whether or not
to accept medically indigent transfer patients
(Horty, 1987).
Other potential outcomes of the demand to
provide increasing levels of care to the poor are
either movement to a two- or multi-tiered system of
care or rationing of care. The former has been ad-
dressed by Reinhardt (1987) and Friedman (1984),
while the latter has been investigated by Merrill and
Cohen (1987); Fuchs (1984); and Schwartz and Aaron
(1984). A primary issue for public hospitals is
whether they have taken steps in these directions as

alternatives to provide full access to patients
without ability to pay.
This project seeks to develop a better under-
standing of the extent to which hospitals are com-
mitted to providing access for indigents, and how ex-
tensive the uncompensated care and patient transfer
problems are. It also attempts to determine whether
hospitals have established transfer policies, what
the emphasis of such policies are, and whether trans-
fers are forcing paying patients out of public hospi-
Access to care for AIDS patients. A new set
of questions about access to care have come to the
fore as the incidence of AIDS and the number of
problems associated with the treatment of AIDS
patients have increased. Much of the published in-
formation about the institutional impacts of AIDS
treatment is useful primarily in understanding the
demands on resources, need for alternative services,
and additional funding (Green et al, 1987/arid
Iglehart, Read and Wells, 1987), as well as specify-
ing policies for combating AIDS (Silverman, 1987).

Recently, a study of public and private
teaching hospitals was conducted jointly by the Na-
tional Association of Public Hospitals and the Coun-
cil of Teaching Hospitals. It found that the lions
share of the support for the treatment of AIDS
patients has come from the public sector, with
private insurance paying only 17% of a total 1985
price tag of $380 million (Andrulis et al, 1987b).
That study also analyzed the extent to which state
Medic.*id programs supported the remaining 83% of the
costs nf treating AIDS. The investigators reported
that, in states with liberal Medicaid programs (i.e.
state where more than 45% of the poor population are
covered by the Medicaid program), more private teach-
ing hospitals were treating a greater portion of the
AIDS population, while in states with restrictive
Medicaid programs the burden was being shouldered
primarily by the public teaching hospitals. The
study concludes that "public hospitals in these
states may be left with a very hard choice: to treat
these patients and be resigned to a growing percent-
age of uninsured cases, or to close or severely limit
access to care for these patients (Andrulis et al,
1987a, p. 118.)

Investigation of several key issues relating
to treatment of AIDS patients is an important aspect
of this research project. Since the study includes a
sample of non-teaching as well as teaching public
hospitals, it should provide additional understanding
about the AIDS problem. The study also utilizes the
classification scheme developed by Andrulis et al
(1987a) for identifying Medicaid programs as liberal
and restrictive.
Teaching hospital status. The public hospi-
tals' commitment to providing graduate medical and
other education programs has been well-documented
(Commission on Public-General Hospitals, 1978 and Na-
tional Association of Public Hospitals, 1982). Part
of the rationale for the teaching mission of public
hospitals derives from the fact that the wide array
of poor people accessing these hospitals provides a
diverse and interesting group of cases for treatment
by physicians in training. Lewin and Lewin (1985)
predicted that as uncompensated care levels and com-
petition for paying customers both increase, hospi-
tals that have traditionally provided care to the
poor in conjunction with their teaching missions may

have incentives to reduce or even discontinue this
commitment. They also suggested that it is likely to
be the private and state-owned university teaching
hospitals that take such actions.
Threats to the teaching mission are coming
from other fronts as well. The acquisition of teach-
ing hospitals, particularly some of the large univer-
sity institutions, by for-profit hospital chains has
raised concerns about continued commitment to educa-
tion, research, and indigent care. One recent study
reported that the original purchase agreements have
required the continued support of these commitments
for at least some period of time, but the report also
stated that "continuation of these activities is more
likely to be a function of third-party payment
policies than of proprietary versus nonprofit hospi-
tal ownership" (Feder and Hadley, 1987, p.325).
Payment policies for graduate medical educa-
tion have come under closer scrutiny since the advent
of DRGs. This is not unexpected because over the
years Medicare has been a primary payor of graduate
medical education under the assumption that teaching
hospitals treat a more complex mix of Medicare cases
than non-teaching hospitals. Only recently has it

become apparent that some teaching hospitals appear
to have received windfall profits under the DRG reim-
bursement methodologies. In addition, recent studies
by Welch (1987) and Goldfarb and Coffey (1987) sug-
gest that the teaching hospitals may not, in fact,
treat a more severe mix of Medicare cases. The
former study recommends altering the payment
methodology, while the latter advocates more study.
It appears there is not consensus on the
issue of the absence of Medicare case six differences
between teaching and non-teaching hospitals, and this
author is not aware of other studies that address
differences in Medicare and non-Medicare case mix
controlled for teaching status.
A recent evaluation conducted for the Florida
legislature concluded that the overall case mix of
six major teaching hospitals in that state was more
complex than other teaching and non-teaching com-
parison institutions (Policy Analysis Inc., 1988).
Based on that and other study findings, the Florida
legislature approved funding to provide additional
state support for the six graduate medical education

The findings of these studies are clearly
mixed. They are important because they point out the
vulnerability of teaching programs to future changes
in Medicare, and the need for support from other en-
tities that may not have supported teaching programs
in the past. This dissertation research project will
address several issues related to teaching and non-
teaching public hospitals and the commitment of those
facilities to continuing involvement in graduate
medical education.
Implications of Political and Economic Forces
As discussed at the outset of Chapter I, ur-
ban public hospitals are placed in a difficult posi-
tion when economic and political forces that are
designed to constrain spending also lead to more
uninsured persons, more uncompensated care and create
other problems while concomitantly creating more
demand of public hospitals' services. This section
addresses issues related to the impacts of increasing
numbers of uninsured individuals, cost containment
and efforts to change the public hospital delivery

The uninsured. The problem of the employed
uninsured has in the last decade become an important
public policy issue. An early study showed that in
1977 "almost 22 percent of the working poor lacked
any formal health insurance coverage throughout the
year" (Berk and Wilensky, 1984, p. 5). The uninsured
working poor have been shown to use fewer physician
services, drugs and hospital stays (Wilensky and
Berk, 1982).
More recent studies have estimated the unin-
sured population to be between 17 and 26 million
people (Wilensky, 1988; Monheit et al, lS-iS; Berki et
al, 1985; Farley, 1985; Davis and Rowlanc1983; and
National Association of Public Hospitals, 1983a and
1983b). Of the total uninsured, it is estimated that
over 55.6% are employed. It is also known that many
of the uninsured lost their health insurance through
unemployment, worked in industries that did not typi-
cally provide employee health insurance coverage, or
worked for small businesses that cannot afford to pay
expensive health insurance premiums for employees.
In addition, it has been suggested that the uninsured
population is a function of "the shift in employment
from manufacturing to services, declining unioniza-

tion, and increasing proportions of part-time and
self-employed workers" (Black, 1986, p.211).
A partial solution to the problem was
provided when Congress passed the 1985 Consolidated
Omnibus Budget Reconciliation Act (COBRA), which re-
quired employers who lay off workers to continue to
provide health care coverage. However, this legisla-
tion has dealt with only the tip of the iceberg.
Numerous other solutions have been suggested, includ-
ing Medical Individual Retirement Accounts (MIRAs),
mandated employer health insurance coverage, state
insurance pools, tax credits for purchasing insurance
coverage, development of alternative insurance
products, voucher systems, and national health in-
surance (Monheit et al, 1985; McDaniel, 1986;
Bovbjerg, 1986; Bovbjerg and Roller, 1986; Lewin and
Lewin, 1984, 1987; Regula, 1987; Wilensky, 1987,
1988; Laudicina, 1988; Thorpe, 1988; King, 1986; and
Dunham, Morone, and White, 1982.).
When uninsured and indigent populations are
combined, the problem of providing care to this pool
of medically indigent people becomes quite substan-
tial. Numerous recent studies have assessed the mul-
tiple impacts of caring for the medically indigent

(Bazzoli, 1986; Mundinger, 1985; Nutter, 1987;
Colorado Task Force on the Medically Indigent, 1984).
Thorpe and Brecher (1987) found that public hospi-
tals' commitment to serving the uninsured poor was
not related to the type of government ownership and
suggested it was more a function of local government
fiscal status, political commitment to providing
care, and relationships between the public and
private hospitals in the community.
Even with the pressures at the state and
federal level to find indigent care solutions
(Richards, 1984), continued access to care is clearly
a very real issue for the poor and uninsured. This
study addresses the extent to which public hospitals
have remained committed to providing access for all
Cost containment. As discussed in Chapter I,
cost containment strategies were designed as politi-
cal and economic efforts to constrain the rising
costs of health care. While there is no consensus on
whether these programs have been effective as yet, it
is clear that some cost containment efforts have in-
creased the vulnerability of public hospitals.

Cost shifting was used in the past by hospi-
tals to apply the revenues of paying patients to sub-
sidize the costs of non-paying patients and non-
revenue producing departments ( Meyer, Johnson, and
Sullivan, 1983? and Ginsburg and Sloan, 1984). As
the costs have risen, both public and private pur-
chasers have sought to become more prudent purchasers
and to pay only for services actually rendered. This
strategy reduces the extent to which providers can
shift costs and is partly responsible for the declin-
ing commitment of certain hospitals to continue
providing charity care.
The impact of DRGs is likely to have a
similar effect. This particular issue has been ad-
dressed extensively from a systems analysis perspec-
tive by Ziegenfress (1985). The DRG payment system
is designed to allow Medicare to purchase care on a
case specific basis (Rettig et al, 1987). If pay-
ments are consistently below the cost of providing
care, hospitals will have increasing levels of bad
debt and contractual write-offs. One recent study
has suggested that the Medicare prospective payment
system may be responsible for increases in hospital
uncompensated care (Sheingold and Buchberger, 1986).

If this is universally true, hospitals are likely to
be less committed to providing
charity care.
Competition. The movement toward a competi-
tive market in health care has significant implica-
tions for public hospitals. It is clear hospitals
compete only for paying patients. It has been
pointed out that as voluntary hospitals become more
and more business-oriented, they have fewer incen-
tives to share the burden of charity care and provide
humanitarian services (Jones, DuVal, and Lesparre,
1987), which in turn may lead to increased patient
dumping and the transfer of indigent care burdens.
The long run impact of these policy changes will not
be known for some time, however.
Vladeck (1985) has suggested that, even
though the health care pendulum has swung toward com-
petition, there is still a need for community hospi-
tals to provide services to the community. He fur-
ther asserts that the pendulum will swing back the
other way in favor of more regulation. Especially if
it is perceived that hospitals are not meeting the

needs of their communities and providing care to the
indigent, regulatory alternatives may be used to im
pose redistribution.
Efforts to Change the Public Hospital Delivery System
Numerous problems have plagued public hospi-
tals over time. These include obtaining capital to
upgrade facilities, tight funding, and uncompensated
care, among others. A long-time observer of the woes
of public hospitals, Friedman has documented the ex-
istence of these problems (1980; 1982; 1987a; 1987b;
1987c; and 1987d.)
In trying to address these problems, studies
have shown that reimbursement policies have major im-
pacts on the revenue position of financially dis-
tressed public hospitals (Kelly and O'Brien, 1983;
and Feder, Hadley, and Mullner, 1984b), and thus sug-
gestions of alternative ways to assist public hospi-
tals have been made. These include changing in-
surance coverage, changing reimbursement, providing
direct assistance (Kilstein, Sanders and Schieber,
1980), emphasizing the provision of primary health
care services (Fleming and Anderson, 1986), or man-

dating national health insurance (Henderson, 1984;
Craig and Koleda, 1978; Reinhardt, 1987).
Numerous studies have documented alternative
survival strategies that organizations might con-
sider, including creating new revenue sources, cor-
porate reorganization, horizontal diversification,
vertical diversification, and consolidation
(Rosenstein, 1986; Andrulis, 1986; Jones and Sloate,
1987; Galkail et al, 1986; Pinch 1983; Super, 1984;
and Boufford, 1986).
The financial distress of public hospitals,
as well as political pressures, have led local and
state governments that operate public hospitals to
consider alternative ways of meeting their respon-
sibilities of providing care to their communities.
Isaacs, Lichter, and Lipschultz (1982) and Shanks and
Tynan (1984) used case studies to assess a variety of
options, including changes in governance, implementa-
tion of improved management methods, contracting out
management, joining multi-hospital systems, changing
service mix, sales, leasing, divestiture, changing
mission, brokering arrangements, and closure.
Several recent studies have examined the ex-
tent to which contract management represents a viable

alternative. The decision to move to contract
management involves a host of legal and policy issues
as discussed by Brown (1981a) and Roemer and Shonick
(1980), and is in large part determined by "the
availability of external suppliers and the potential
for scale economies" (Ferris and Graddy, 1987). The
success of contracting to date has been limited.
Several case studies conducted by Shonick and Roemer
(1982 and 1983) found private management contracts
provided only limited help in improving the status of
seven California county hospitals. Others have ob-
served that decreasing payroll expenditures, increas-
ing provision of ambulatory care, and significant
changes in the provision of care to the poor occur
when public hospitals are run under management con-
tracts (Alexander and Rundall, 1985). While cost
savings have been shown in some cases, they are at
the expense of reductions in service delivery
(Rundall and Lambert, 1984). The tradeoffs between
contract management and hospital acquisition also
have been examined (Morrisey and Alexander, 1987).
That study found that hospitals in weak market areas
were not good candidates for acquisition, that
management contracts did not usually lead to acquisi-

tion, and that management contracts may be predictors
of future hospital closures.
Others have investigated the sale of public
hospitals and evaluated the processes that ad-
ministrators and trustees must go through in reaching
the decision to sell (Reed, 1984). One recent study
reported that, while sales had led to improvements in
hospital physical plants, this was achieved at the
expense of increases in patient care costs and capi-
tal costs (U.S. General Accounting Office, 1986).
A major question relating to the sale of
hospitals is the impact that the increasing involve-
ment of for-profit institutions will have on the
health care system. These issues have been addressed
by Dallek (1983), Feder and Hadley (1987), Whiteis
and Salmon (1987) and Schlisinger, Marmon and Smithey
(1987). Comparisons of public hospitals to non-
profit and for-profit hospitals have shown public
hospitals not to be inferior to other providers
(Hyman, 1986 and Hollingsworth and Hollingsworth,
Closure has been considered as an alternative
option to keeping financially stressed institutions
open (Rosenstein, 1986) and was undertaken at

Philadelphia General Hospital in the late 1970's
(Friedman 1987a; and Rosenberg# 1982). According to
Sager (1981), two views of closure exist: one is that
closure removes excess capacity and thus is benefi-
cial; the other is that it frequently removes all
services from under served areas of major cities and
thus hinders access primarily for the poor and
minorities. Rose (1983) addressed the legal dif-
ficulties of trying to prevent the relocation or
closure in under served areas of the major cities.
What all of these studies seem to suggest is
that there are no panaceas. This dissertation
research project will examine the extent to which
these and other types of strategies have been imple-
mented by public hospitals.
Research Questions to be Addressed
This review of the literature confirms that
there are a multitude of unanswered questions sur-
rounding public hospitals. The research undertaken
in this project will address some of the major ones.
These include:
_ Have public hospitals made internal changes,
for example, changes to their missions, and

what have been the outcomes of those decisions
in terms of overall performance?
What impact do regulatory and reimbursement
factors (such as Medicare and Medicaid cost
containment programs), competitive factors
(such as patient transfers), and
socioeconomic, demographic and political
forces (such as increasing numbers of in-
digent, uninsured, and AIDS patients) have on
public hospitals and how do public hospitals
respond to such factors?
What efforts have public hospitals made to en-
sure survival, what strategic responses have
been adopted, and how successful have they
Do differences exist among the different types
of public hospitals with respect to financial
status, utilization, and the impacts of the
issues listed in the earlier questions?
What role do public hospitals have to play in
our society?
Who should bear the burden of paying for in-
digent care?

With these questions in mind, we now turn to
Chapter III, which describes how this research
project was designed and operationalized.

This chapter addresses the methodological
issues related to the conduct of this study. As
such, it covers the designs of Phases I and II of the
study, secondary data sources used, data collection
procedures and sample selection, variable selection,
and statistical procedures. Each of these topics
will be discussed in the following subsections.
Design of Phase I Analyses
As discussed briefly in Chapter I, the pur-
pose of the first phase of this study was to obtain a
broad overview of the characteristics and status of
public hospitals in the early 1980's. Thus, Phase I
involved a set of comparative analyses of public
hospital data from 1980 and 1984. The analyses per-
tained to those two points in time, as well as to the
percentage change that took place during^that five-
year study period.

The sample of hospitals to be included in
Phase I was drawn from the population of all public
hospitals in the United States. The criteria for in-
clusion were: (1) that a hospital had to have been a
public provider during either of the two study years,
(2) that it had to have been a non-federal short-term
general type of hospital, and (3) that it had to have
been located in a metropolitan area. The final
sample of hospitals was comprised of all public
university hospitals and all public hospitals located
in berth large and small metropolitan areas. Rural
providers, specialty hospitals, and long-term care
institutions were excluded from the study. The one
exception to this was the University of West Virginia
Hospital, which though located in a rural area, was
included with the other university hospitals because
it is a large public institution and is more similar
to other university hospitals than to other rural
The comparative analyses for Phase I utilized
data primarily from the American Hospital Association
data tapes. Details about this source of data are
presented later in this chapter. The analyses
focused on assessing changes that took place during

the study time frame and on assessing differences
across the sample when stratified in terms of the
university, large metropolitan, and small
metropolitan characteristic, as well as by other
hospital characteristics. The specific variables
that were used included: cost, utilization, payor
mix, service mix, ownership, management arrangements,
capacity, involvement in medical education, and
staffing of the institutions. Each of the analysis
variables is defined later in this chapter and the
results of these analyses are presented in Chapter
Design for Phase II of the Study
Phase II was intended to provide more current
information on the status of public hospitals and how
they have adapted to the changes taking place within
the health care industry. It was designed as a
primary data collection survey to obtain current in-
formation as of 1988 and for some variables to deter-
mine the changes that took place in the three prior
years 1985 through 1987.
The data collection process was developed
with several goals in mind. First, it was intended

to not duplicate data and information that could be
obtained from existing sources. Second, it focused
on a circumscribed set of issues that were considered
to be some of the most important and difficult issues
for public hospitals to deal with. Third, considera-
tion was given as to whether to conduct a mail or
telephone survey; economics dictated that a mail ap-
proach be used because sufficient funding was not
available to conduct telephone interviews. Finally,
the survey was designed so that it could be completed
in a short period of time and would not require a
great deal of data compilation by the hospital.
The survey involved sending mail question-
naires to the administrators of each of the sample
hospitals. The instrument was pilot tested on
several individuals who had experience in developing
this type of survey and knowledge of the substantive
areas. The specific details on how the survey was
administered are presented in the data collection
section of this chapter.
The survey was constructed for and adminis-
tered at both rural and urban sites. The subsample
of metropolitan providers, however, was selected out
for use in the Phase II analyses. This group in-

eluded all of the university hospitals, all of the
large metropolitan hospitals, and a sample of the
small metropolitan hospitals. The data on rural
hospitals will be used for another purpose.
The survey focused on obtaining information
on the following key areas of interest:
- changes in hospital mission and organizational
_ competition in the community,
_ access to care for the poor,
the adequacy of reimbursement from federal,
state and local government sources,
- changes in service mix and efforts to diver-
- utilization changes,
. the impact of AIDS on the hospital and the
community, and
- the future role of public hospitals.
The specific data items that were used in the
analyses are defined in more depth later in this
chapter and the findings of the Phase II analyses are
described in Chapter V.

Secondary Data Sources
Several secondary sources also were used to
compile the data needed to carry out this project.
These included the American Hospital Association
(AHA) data tapes; the editions of the AHA Guide to
the Health Care Field for 1981, 1982, 1983, 1984,
1985, and 1987, and the State and Metropolitan Area
Data Book 1986. Each of these sources is described
briefly in this section.
AHA Data Tapes
Each year the American Hospital Association
conducts its Annual Survey of Hospitals in the U.S.
and the territories. The survey is quite extensive
and includes obtaining hundreds of variables that
measure facilities and services, organizational af-
filiations, organizational control, bed availability
utilization, costs, revenues, assets, liabilities,
capital expenditures, staffing, and medical staffing
A selected set of non-confidential variables, mainly
non-financial types of data, are summarized by the
AHA into a survey data tape that is released for
public use on an annual basis.

The tapes for 1980 and 1984 were used to
provide the data for the Phase I analyses. These two
years were selected, in part because they represent a
five year study interval, and in part because 1984
was the most recent data tape available at the time
this study was being operationalized.
AHA Guide
In addition to producing the AHA tapes> the
AHA annually publishes the AHA Guide to -the Health
Care Field from the data tapes. This document lists
all hospitals in the country, with a limixed amount
of information about each institution. Bie editions
for 1981 through 1985 and for 1987 were utilized in
the study. Each volume contains information from the
survey conducted in the preceding year, i.e. 1980 to
1984 and 1986, respectively for the editions listed
The AHA Guides from the early 1980's were
used to trace the hospitals that existed on only of
the two data tapes. Each hospital was followed to
determine whether it was under a different type of
ownership, whether it had gone out of business, or
what had transpired.

The 1987 Guide was used to verify the names
and addresses of the hospital administrators who
received the Phase II survey and to obtain more
recent data items for use in conjunction with the
survey data analyses. The data items that were coded
by hand were beds, admissions, average daily census,
occupancy, expenses, payroll expenses, and FTEs.
State and Metropolitan Area Data Book
This publication is compiled by the U.S.
Bureau of the Census (1987) to provide summary
statistics on population, population characteristics,
births, deaths, physicians, health care providers,
crime, public aid, housing, income, education, local
government finances, and a variety of other topics.
It was used to provide a few key socioeconomic/
demographic characteristics for each of the
metropolitan areas involved in the study. These in-
cluded: total population, per capita income, median
value of occupied housing units, total number of
short-term hospital beds, and per capita property
taxes. These data were coded and computerized for
use mainly in the analyses where it was appropriate

to account for commitment and capacity of the com-
munity to support the local hospital.
Using this data source was problematic for
certain metropolitan areas. Two metropolitan area
designations in Illinois had changed. The data for
five New England metropolitan areas in Connecticut
and Massachusetts were in some cases missing. This
is due to the fact that the metropolitan area desig-
nations do not coincide with county boundaries; and
the data for the one non-metropolitan hospital was
unavailable. In order to have as much complete data
available across the areas, the original data sources
from which the Data Book was compiled were used to
obtain as many data items as possible. For example,
the raw data sources were used to compile complete
data for the hospital bed and population variables.
The median income variable for the New England
metropolitan areas was updated by calculating a
weighted average of the component towns. The
property tax measures and housing value measures were
only available at the county level, but were weighted
by population to derive a better estimate. Use of
these procedures provided a complete data set in all
cases except one.

Data Collection Procedures and Sample Selection
This section deals with the procedures used
to collect the primary and secondary data for the
study. It addresses how the study samples were
defined, the procedures used in collection of the
secondary data and the survey data collection proce-
dures .
Secondary Data Collection Procedures
The AHA data tapes were available through the
Graduate School of Public Affairs for use on this
study. A considerable amount of time and effort was
required to create an SPSS system file from the raw
data files, to clean up the data, to create trans-
formed variables for the analysis, and to extract the
study sample of hospitals from the some 7,000 cases
on the AHA tapes.
The universes of all of the university, large
metropolitan, and small metropolitan hospitals were
included for the Phase I analyses. The universe was
comprised of 486 public hospitals in 1980 and 451
public hospitals in 1984. The data presented in
Table 3-1 provide statistics on selected key vari-
ables comparing the universe of public hospitals to

TABLE 3-1: Comparison of Study Sample Hospitals to Universe of Public
Hospitals on Selected Key Variables.
Universe of
Public Hospitals Study Sample
1980 Cost/Day 1584 238.39 109.68 486 301.10 132.95
1984 Cost/Day 1441 428.41 180.65 451 522.18 193.16
1980 % Payroll Exp. 1584 .492 .056 486 .494 .059
1984 % Payroll Exp. 1442 .483 .050 451 .484 .052
1980 % Medicare Days 1583 .450 .135 486 .385 .135
1984 % Medicare Days 1441 .468 .145 451 .399 .142
1980 % Medicaid Days 1583 .098 .087 486 .120 .112
1984 % Medicaid Days 1441 .120 .102 451 .132 .094
1980 Occupancy Rate 1584 .609 .166 486 .693 .138
1984 Occupancy Rate 1442 .527 .169 451 .632 .151
1980 Length of Stay 1584 6.49 2.46 486 7.04 2.46
1984 Length of Stay 1441 6.14 2.67 451 6.66 2.43
SOURCE: AHA Data Tapes, 1980 and 1984

the universe of metropolitan hospitals. Although
cost per day and occupancy rates were higher and
length of stay was slightly longer for the
metropolitan hospitals, the other differences between
the two groups were not substantial.
Of the 486 hospitals that existed in 1980,
there were 5 hospitals that closed during the five-
year study time frame, another 10 that merged with
other hospitals during that same period, and 41 that
converted from public to nonprofit or for-profit
There were 8 institutions where the reverse
had occurred. That is, the providers were not public
in 1980 and therefore had changed ownership from
non-profit or for-profit to public. Three additional
public hospitals opened between 1980 and 1984.
These data were created by data transforma-
tions, since it applied to such a small number of
hospitals. The additional data for 1986 were coded
manually and computerized in conjunction with the
survey data.
Data on the characteristics of the
metropolitan areas were also coded by hand from the
State and Metropolitan Area Data Book 1986. These

data were entered into a separate data file and
merged with the AHA and survey data files by matching
on metropolitan area code.
Primary Data Collection Procedures
The conduct of the primary data collection
effort took approximately four months. The survey
questionnaire was mailed to hospital administrators,
along with a cover letter and a self-addressed
stamped, return envelope. A copy of that cover let-
ter and the survey instrument are provided in Appen-
dix A. It was suggested that the administrator or a
member of the administrative staff serve as the
respondent. It was also requested that the survey be
completed and returned within a month.
A total of 242 surveys were mailed, 48 to
university hospitals, 66 to large metropolitan hospi-
tals, and 128 to small metropolitan hospitals. This
represents a sample of 100% of the university and
large metropolitan hospitals and approximately one-
third of the hospitals in small metropolitan areas.
The initial return rates looked as if the
response rates would be poor from the university and
large metropolitan facilities. Follow-up phone calls

were made to the university and large metropolitan
hospital administrators to assure an adequate
response rate from these two groups.
The overall response rate on the survey was
approximately 36%. A total of 88 questionnaires were
returned 26 from large metropolitan hospitals, 19
from university hospitals, and 43 from small
metropolitan ones, which represents response rates of
39.4%, 39.6%, and 33.6%, respectively. While it may
have been desirable to have a higher response rate
from the small metropolitan institutions, adequate
sample sizes were attained and no further follow-up
was done.
Comparison tests were prepared to assess
whether the sample of survey respondents differed
from the entire universe of metropolitan hospitals.
Those data are shown in Table 3-2. The values for
the metropolitan hospitals on all variables except
for Medicare patient days are higher than the
universe-.of hospitals. However, these differences
are small enough to enable generalization to the
Table 3-3 provides data comparing hospitals
that responded to the survey with non-respondents.

TABLE 3-2: Comparison of Survey Hospitals to All Metropolitan Hospitals
on Selected Key Variables.
All Metropolitan
Hospitals Survey Hospitals
1980 Cost/Day 400 291.06 125.95 86 347.77 153.98
1984 Cost/Day 367 509.33 192.40 84 578.31 187.42
1980 % Payroll Exp. 400 .491 .060 86 .504 .056
1984 % Payroll Exp. 367 .482 .052 84 .493 .053
1980 % Medicare Days 400 .395 .134 86 .341 .136
1984 % Medicare Days 367 .410 .138 84 .351 .148
1980 % Medicaid Days 400 .113 .106 86 .151 .133
1984 % Medicaid Days 367 .122 .100 84 .178 .153
1980 Occupancy Rate 400 .685 .142 86 .726 .118
1984 Occupancy Rate 367 .619 .150 84 .688 .145
1980 Length of Stay 400 6.92 2.50 86 7.61 2.20
1984 Length of Stay 367 6.49 2.32 84 7.41 2.75
SOURCE: AHA Data Tapes, 1980 and 1984

TABLE 3-3: Comparison of Survey Respondents to Survey Non-Respondents on
Selected Key Variables.
Non-oRespondents Survey Respondents
1980 Cost/Day 152 332.18 137.07 86 347.77 153.98
1984 Cost/Day 138 561.27 192.29 84 578.31 187.42
1980 % Payroll Exp. 152 .496 .066 86 .504 .056
1984 % Payroll Exp. 138 .486 .058 84 .493 .053
1980 % Medicare Days 152 .352 .133 86 .341 .136
1984 % Medicare Days 138 .363 .141 84 .351 .148
1980 % Medicaid Days 152 .144 .126 86 .151 .133
1984 % Medicaid Days 138 .143 .105 84 .178 .153
1980 Occupancy Rate 152 .708 .127 86 .726 .118
1984 Occupancy Rate 138 .655 .150 84 .688 .145
1980 Length of Stay 152 7.58 3.20 86 7.61 2.20
1984 Length of Stay 138 6.95 2.67 84 7.41 2.75
SOURCE: AHA Data Tapes , 1980 and 1984

While there are small differences on these variables,
there should be no problems generalizing the survey
results to this larger group.
Variable Selection
A large number of variables were available
from which to choose the primary analysis variables.
This section addresses the variable selection process
for data from the AHA data tapes, the socioeconomic/
demographic data for metropolitan areas, and the sur-
vey variables. Information is provided on how each
variable is measured.
AHA Data Tape Variables
The AHA data was used to create a set of
variables that measured hospital cost, utilization,
payor mix, service mix, bed capacity, productivity,
management arrangements, ownership, location, type,
and involvement in medical education. The specific
variables that were selected as measures of these
concepts are described below. In general, the
interval-level data variables are available for 1980
and 1984 and allow for the calculation of a percent
age change variable between these two years.

Cost. The measurement of costs in studies of
this sort have often used total hospital costs
deflated by a measure of utilization as a primary
measure of hospital output (Sloan and Becker, 1981).
The utilization statistic applied is either patient
days or admissions. This study followed that tradi-
tion, and used patient days because it was available
for both study years. In addition, a measure of the
portion of total expenses devoted to payroll expenses
was also developed to evaluate the proportion of
costs spent on labor as a proxy measure for labor
resource consumption. The relationship between the
two measures was assessed to assure that they were
not collinear. The correlation coefficients for 1980
and 1984 were quite low at -.02 and -.08, respec-
tively, clearly indicating that the two variables
were measuring different phenomena. Thus, the deci-
sion was made to use both variables in the analyses.
Utilization. Complete data were available on
the AHA tapes to create four measures of hospital
utilization. These included:
- occupancy rate (the extent to which hospital
bed capacity is utilized),

- length of stay (the overall average number of
days each patient remains hospitalized),
Medicare length of stay, and
_ Medicaid length of stay.
After reviewing the descriptive statistics, e.g.
means and standard deviations, and the correlation
coefficient presented in Table 3-4, the decision was
made to retain all variables at least for descriptive
purpose. Since, there was some concern about the
high correlations between overall length of stay and
Medicare length of stay, which were .69 and .72
respectively in 1980 and 1984, the decision was also
made to utilize only one of these measures in any
regression analyses that were performed.
Payor Mix. Several potential variables that
characterized the extent to which hospitals treat
patients with different types of insurance coverage
were available for use in the analyses. The specific
items pertained to the major public payors, i.e.
Medicare and Medicaid. For each payor the^following
variables were analyzed in the preliminary analysis
. percent admissions in 1980,

TABLE 3-4: Pearson Correlations for the Utiliza-
tion Variables.
Occupancy Rate .10a
Length of Stay .27
Medicare Length
of Stay
of Stay
of Stay
Occupancy Rate .13a
Length of Stay .56
Medicare Length
of Stay
.17 .51
Medicaid Occupancy
Length Rate
of Stay
of Stay
aAll correlations are significant at
the .001 level except those between occupancy rate
and Medicaid length of stay, which are both sig-
nificant at the .01 level.
SOURCE: AHA Data Tapes, 1980 and 1984.

_ percent patient days in 1980 and 1984,
. percent discharges in 1984, and
- percent outpatient visits in 1984.
The correlations presented in Table 3-5 indicate that
the admission and patient day variables in 1980 are
extremely highly related, with the respective cor-
relation coefficients being .87 for Medicare and .92
for Medicaid. Similar results for 1984 show coeffi-
cients of .89 for Medicare and .81 for Medicaid. The
collinearity of these data forced the choice between
variables. The decision was made to utilize the
patient day measures, since identical variables were
available for both study years. Furthermore, it was
decided to retain both the Medicare and Medicaid
variables for analysis purposes, since the two
patient day variables were inversely related. That
association was not so extensive, however, that the
variables were measuring the same thing. Finally,
the outpatient visit variables were also retained,
since they reflect an alternative to inpatient
utilization, although they are less useful because
date were available only for 1984.

TABLE 3-5: Pearson Correlations for the Payor
Mix Variables.
% Medicare Admissions -.39
% Medicare
Patient Days -.41 .87
% Medicaid
Admissions .92 -.36 -.39
% Medicaid % Medicare % Medicare
Patient Days Admissions Patient Days
% Medicare
Discharges -.39
% Medicare Patient Days -.37 .89
t Medicare Outpatient Visits a -.08 .39 .34
% Medicaid Discharges .57 -.48 -.45 -.21
% Medicaid Patient Days .53 -.37 -.48 a -.10 .81
% Medicaid Outpatient Visits % Medicare Discharges % Medicare Patient Days % Medicare Outpatient Visits % Medicaid Discharges
All correlations are significant at the .001 level, except the
correlation between the percentage Medicare and percentage Medicaid out-
patient visits, and between the percentage Medicaid patient days and
percentage Medicare outpatient visits, which are significant at the .05
SOURCE: AHA Data Tapes, 1980 and 1984.

Service Mix. The AHA survey collects infor-
mation on over 50 different types of facilities and
services that a hospital might offer. In order to
arrive at a manageable number of variables, two
criteria were applied in selecting variables for the
study. First, only those services that were par-
ticularly important to the types of care typically
provided by public hospitals were selected. Second,
some of what could be termed the "trendy" new types
of services that represent areas for hospital diver-
sification were also included. Two problems with
these data were (1) that specific services were not
uniformly collected on the 1980 and 1984 surveys and
(2) that the 1984 data tape had data on some services
based on 1982 data and other services based on 1984
data. Each service was measured by dichotomous vari-
ables reflecting the presence or absence of the serv-
ice. Measures for the following services were
selected as indicators of complexity of service mix
for the study:
- neonatal intensive care unit in 1980 and 1984,
- burn care unit in 1980 and 1984,
. emergency department in 1980 and 1984,
- long-term care unit in 1980 and 1984,

- trauma unit in 1984,
- HMO contract in 1984,
- PPO contract in 1984,
- acute psychiatric care in 1980 and 1982,
- addiction recovery unit in 1980 and 1982,
- skilled nursing care unit in 1980 and 1982,
. intermediate long-term care unit in 1980 and
- rehabilitation unit in 1980 and 1982,
- home health care program in 1980 and 1982, and
- hospice program in 1980 and 1982.
The decision was made to retain all variables for
analysis purposes, but to use only selected ones in
the regressions.
Bed Capacity. The overall size of the
facility was measured using what the AHA has termed
statistical beds. This is an adjusted measure of
bedsize that takes into account the extent to which
beds in the individual facility were opened or closed
during the year. For purposes of conducting the
regression analyses, the statistical bed variable is
used. A categorical bedsize variable was used to as-
sess differences in other continuous variables in

terms of hospital size. The specific categories in-
cluded: 6-24 beds, 24-49 beds, 50-99 beds, 100-199
beds, 200-299 beds, 300-399 beds, 400-499 beds, and
500+ beds.
Productivity. Two proxy indicators of hospi-
tal productivity were created for use in the study.
One was the total number of hospital staff per bed;
the other was hospital discharges per bed. The vari-
ables were not highly related to each other when cor-
relation coefficients were reviewed.
Management Arrangements. Several variables
were selected as measures of the hospital management.
These were dichotomous variables that addressed the
extent to which the hospital was under a management
contract in 1980 and 1984, whether the hospital was
part of a multi-hospital system in 1984, whether the
hospital was leased, owned or sponsored by another
corporation, and whether the hospital itself managed
other hospitals. These measures were all included
primarily for descriptive purposes.
Ownership. This categorical variable iden-
tified the type of organizational control under which

the hospital operated, i.e., whether it was run under
state, county, city, city/county, or hospital dis-
trict governance. This measure was used as an inde-
pendent variable for assessing differences across the
continuous variables. It was also transformed into a
series of dichotomous variables for use in the
regression analyses.
Region. This indicator was taken from the
AHA and used to analyze variation in geographical
location. The variable identifying the nine U.S.
Census regions was drawn from the AHA tape and used
as an independent variable in the descriptive
analyses. It was collapsed to reflect the four major
regions of the country for the regression analyses.
Hospital Type, j This categorical variable was
used to stratify the samples of hospitals in order to
distinguish between university, large metropolitan,
or small metropolitan hospitals. It was also trans-
formed into a series of dichotomous variables for the
regression analyses.

Medical Education. Several variables were
considered as potential measures of the extent to
which hospitals were involved in medical education.
Four variables were reviewed in the preliminary
analyses, including: whether the hospital was af-
filiated with a medical school, whether the hospital
was a member of the Council of Teaching Hospitals
(COTH), whether the hospital operated an AMA approved
residency program, and the number of interns and
residents per bed. The first three measures were
available for both 1980 and 1984; while the last one
was available only for 1984. Review of the correla-
tions coefficients for these variables, which are
presented in Table 3-6, indicates that the variables
are all measuring similar phenomena. The decision
was made to keep the intern and resident per bed
measure, even though it was only available for one
year, because it was an interval-level variable that
could be used in the regression analyses. The selec-
tion of one variable from the remaining three was
based on substantive considerations. From a sub-
stantive point of view, the residency program measure
was the most direct measure of the hospital's in-

TABLE 3-6: Pearson Correlations for the Medical
Education Variables3.
Affiliation .91
with Med School
Member of .62 .67
Presence of Affiliation
Residency with Med
Program School
Affiliation .62
with Med School
Member of .76 .63
Presence of Residency .64 .94 .64
Program Interns & Affiliation Member of
Residents with Med COth
Per Bed School
aAll correlations are significant at
the .001 level.
SOURCE: AHA Data Tapes, 1980 and 1984.