ORGANIZATIONAL BEHAVIOR AND MANAGEMENT
Authors: Owsley K. , Lindrooth R. 
Published: August 2020

Research Objective

The Internal Revenue Service (IRS) has required nonprofit hospitals to document their community benefit spending in order to justify their tax exemption since 2009. This spending has potential to improve social welfare and should be considered, along with efficiency and prices of traditional hospital services, when evaluating the impact of acquisitions. Existing evidence links variation in spending to local needs, priorities of hospital boards, and financial performance. We hypothesize that independent hospitals have stronger ties to local communities than centralized hospital systems. Local leadership may translate into higher spending on community health improvement activities. Acquisition‐related changes in leadership may influence community benefit spending decisions to reflect the acquirer’s priorities, as well as changes that reflect financial performance. The rapid pace of nonprofit hospital consolidation has made independent hospitals increasingly rare, and the impact of nonprofit acquisitions on the level and type community benefit spending is unknown, despite the promising potential to improve social welfare. We aim to fill this gap.

Study Design

We used difference‐in‐differences specifications to estimate the effect of acquisitions on the proportion of operating expense spent on financial assistance, community health improvement activities, and total community benefits. The control group consisted of independent hospitals with stable ownership between 2010 and 2016 that were contemporaneously matched to acquired hospitals before the acquisition using a propensity score estimated using observable confounders. The doubly robust difference‐in‐differences specification was estimated with and without lagged operating margins to identify the impact of the change in leadership on spending as separate from the indirect effect of spending through financial performance. We also performed subanalysis on cost (efficiency) and operating margins as outcomes. The propensity score specification satisfied conventional overlap and balance criteria, and the difference‐in‐differences specification satisfied tests for preperiod parallel trends.

Population Studied

We analyzed 2010‐2016 data from the American Hospital Association (AHA) Survey, CMS Hospital Cost Reports, and IRS Form 990 and Schedule H data. We limited the analysis to urban short‐term general nonprofit hospitals that were independently licensed in 2010. We further restricted the sample to hospitals that reported facility‐level data to the IRS throughout the sample period. The analysis dataset included 118 urban short‐term general hospitals that were acquired between 2011 and 2015 and the matched control group.

Principal Findings

Acquisitions led to median decreases in community health improvement spending (−$135,591, p<0.05), financial assistance spending (−$1,182,162, p<0.05), and total spending (−$3,308,011 p<0.01) at acquired hospitals. This occurred despite the fact that operating margins improved by 1.9 percentage points after the acquisition (P < .01).

Conclusions

Community benefit spending decreased after independent hospitals were acquired by nonprofit systems. This occurred despite a large increase in operating margins, suggesting that improved margins could be related to lower community benefit spending.

Implications for Policy or Practice

Regulators should consider the impact of nonprofit acquisitions on community benefit spending when evaluating the social welfare impact of acquisitions. Even if acquisitions led to efficiency gains, social welfare could suffer if gains are not passed on through increased community benefit spending or lower prices. Regulatory oversight such as Certificates of Public Advantage (COPAs) could ensure that community benefit spending reflects hospital profitability accordingly.

Primary Funding Source

Agency for Healthcare Research and Quality.