Assessing the Performance of Freestanding Hospitals

Abstract

Freestanding hospitals are becoming less common as more hospitals are joining or establishing relationships with multihospital systems. These associations are driven by factors, such as unrelenting competition in local markets, aging physical plants, increasing labor costs, and higher physician fees, that place a high demand on financial assets. Despite these factors, many freestanding hospitals continue to do well financially, showing increases in total profit margins and total cash flow margins. This article examines which market, management, financial, and mission factors are associated with freestanding hospitals with consistently positive cash flows, relative to those without consistently positive cash flows. The study sample consisted of freestanding, nonfederal, short-term, acute care general hospitals with more than 50 beds and three years of annual cash flow data. Data were taken from the annual surveys of the American Hospital Association, the cost reports of the Centers for Medicare and Medicaid Services, and the Area Resource File of the Health Resources and Services Administration. The data were analyzed using logistic regression to identify those factors associated with a consistently positive cash flow. Freestanding hospitals with positive cash flows were found to have a greater market share and to be located in markets with a higher number of physicians and fewer acute care beds; to have fewer unoccupied beds, higher net revenues, greater liquidity, and less debt on hand; and to treat fewer Medicare patients than those without a positive cash flow. The findings suggest that these hospitals are located in resource-rich environments and that they have strong management teams.