The effect of joining a health system on financial performance

Abstract

The rate of hospitals merging has increased significantly over the last few years. The number of hospital mergers between 2003 and 2009 averaged 55 per year, while mergers for 2010 and 2011 were 72 and 90, respectfully. This research moved beyond anecdotal reports and by using publicly reported data to not only evaluate the financial success of mergers, but also to look at other factors such as size, ownership, geography, environment (urban vs. rural), and market competitiveness to assess impacts on financial outcomes of mergers. This study examined the effect of joining a hospital system based on financial performance. Further, it assessed the relationship of specific organizational and environmental characteristics to determine if these characteristics had any effect on the success of the mergers.

Resource Dependence Theory (RDT) served as the theoretical framework for this study. Based on RDT precepts, two main hypotheses were studied including (1) Hospitals that join a health system have better financial performance after joining a health system than those that do not join a health system, and (2) For hospitals that have joined a health system, certain organizational and environmental characteristics will have greater influence on financial performance. Data from American Hospital Association, Centers for Medicare and Medicaid, and Area Health Resource File were collected, combined, and analyzed to address the research questions.

The results demonstrated that hospital operating margins significantly improved after joining a health system. Findings also suggested (at the 90% confidence interval) that hospitals located in rural areas had improved results following the second year of the merger. However, this study found no empirical support for the expectations that operating expenses would improve or that organizational characteristics (i.e., ownership and adjusted patient days), or environmental characteristics (i.e., percentage of people living in poverty, competitiveness) had a statistically significant effect on the success of a merger.

As hospitals continue to seek ways to remain competitive and to continually serve their mission to care for the members of their communities, this study can serve as a basis for assessing the effect of system membership on financial performance. The results of this study should not be used as the only basis for making merger decisions as the sample size and time period studied were too narrow to reach overarching conclusions. Keywords: mergers, acquisitions, resource dependence theory, affiliations