In the wake of a pandemic that has decimated many hospitals’ budgets, many industry insiders foresee a spike in mergers and acquisitions, in both the for-profit and nonprofit sector. How should anti-trust regulators weigh the costs and benefits of this consolidation for consumers? A recent study by Guy David and colleagues suggests that profit status should not be a factor in regulatory decisions.

Currently, anti-trust law treats for-profit and nonprofit hospitals equally. The primary concern is prices for consumers; both for-profit and nonprofit hospitals have been shown to raise prices similarly after they gain market power. But some have suggested that nonprofit hospitals deserve special consideration, given that they are obligated to provide “community benefits,” often in the form of free and discounted charity care. For-profit hospitals have no community benefits requirements and receive no tax exemptions. The question takes on new urgency at a time when communities are reeling from the health and economic consequences of the pandemic.

New research urges caution

Guy David, PhD is the Gilbert and Shelley Harrison Professor of Health Care Management at Wharton and an LDI Senior Fellow.

In Economic Inquiry, Guy David, along with Dennis Carlton and Cory Capps, compared how nonprofit and for-profit hospitals change their provision of charity care after mergers. They found no evidence that nonprofit hospitals are more likely than for-profit hospitals to provide more charity care or offer unprofitable but needed services in response to an increase in market power.

Measuring community benefits

The researchers used hospital data from the California Office of Statewide Health Planning and Development, which included annual financial reports and inpatient discharge data for hospitals in the state from 2001 through 2011.  

While there are many types of community benefits, most community benefits are delivered as charity, discounted, or uncompensated care (that is, uncollected bills). They measured these benefits in several ways. First, they gathered charity and uncompensated care costs on financial statements. However, the financial value of this care is self-reported, so it varies across hospitals dramatically, confounding comparisons across hospitals. To address the issue, they also assessed charity care volume by finding the overall volume of standardized Diagnostic Related Groups (DRGs) delivered to patients without health insurance. Thus, by combining discharge and financial report data, the authors measured community benefits as:

  1. Reported dollars of charity care
  2. Reported collars of charity care plus uncollected bills (i.e. uncompensated care)
  3. Charity care volume, measured in DRGs, which are the same across all hospitals.

The discharge data also allowed the authors to observe any changes in the provision of unprofitable services, such as psychiatric care, burn treatment, and emergency trauma services. While not typically considered “community benefits,” greater supply of unprofitable services could be seen as altruistic.

How mergers changed community benefits

To test whether nonprofit hospitals provide more charity care than for-profit hospitals as they face less competition, the researchers analyzed charity provision as function of hospital competition and type, controlling for patient mix and local demographics.  

At baseline, across all hospitals (nonprofit and for-profit), charity care, uncompensated care, and volume of uncompensated care all increased over time—in general and as market share grew. A hospital’s profit status did not predict a larger or smaller increase in these community benefits as competition fell.

Similarly, across all hospitals, as market share increased, so did the provision of some, but not all, unprofitable services. However, as with charity care, there was no evidence that nonprofit hospitals increased their provision of unprofitable services relative to for-profit hospitals.

Should nonprofit mergers get special treatment?

These findings provide support for treating nonprofit and for-profit hospitals equally in antitrust regulation. Favorable antitrust treatment for nonprofit hospitals is predicated on the assumption that nonprofit hospitals use increasing market power to help the community more than for-profit ones. Without evidence of greater community benefit, policymakers will need another reason to treat nonprofits differently.  

Widespread economic disruption from the COVID-19 pandemic has led to unprecedented rates of unemployment. In a time of increasing health care needs, mass layoffs have put the deficiencies of employment-based health insurance on full display. Looking ahead, hospitals are likely to see a dramatic rise in uncompensated care due to widespread job losses and financial hardship, with some hospitals being forced to close or merge. As markets become more concentrated, regulators will need to reconsider the role of hospital ownership in creating competitive markets and promoting social welfare.