Antecedents of Hospital Ownership Conversions, Mergers, and Closures

Abstract

This study assesses the determinants of conversions in hospital ownership from 1986 through 1996. To place such changes in context, we also analyze causes of hospital mergers and closures, which are often alternatives to hospital ownership conversion. A consistent result from our analysis is that an important antecedent of ownership conversions is a low profit margin. Conversions from private nonprofit or government ownership to for-profit status are preceded by chronically low margins and high debt-to-asset ratios. By contrast, conversions from for-profit ownership occur quickly following declines in margins. Many mergers seem motivated by a desire to increase market power—a consideration not evident for conversions.

Nursing Home Closures, Changes in Ownership, and Competition

“…Researchers also have mused that hospital closures were the natural consequence of competition. Indeed, one of the most robust findings of the hospital closure literature during the past 15 years has been the assertion that competition drives closures (e.g., Harmata and Bogue 1997;Lynch and Ozcan 1994;McKay and Dorner 1996;Sinay 1998;Sloan, Ostermann, and Conover 2003;Succi, Lee, and Alexander 1997;Topping 1991).…”

Ownership conversion and closure in the nursing home industry

“…In contrast, FP facilities that had negative expected profits under PPS would attempt to exit the market. For any given input mix, NFPs may have lower cost structures because of the use of volunteers and the ability to cover deficits with private and public donations (Sloan et al, 2003). This could make marginally distressed FP facilities convert to NFP either through a change in ownership status or sale to a NFP organization.…”

“…Conversions are a strategy that a firm could use in response to these market and legal dynamics. This is illustrated in the model that Sloan, Ostermann, and Conover (2003) use to predict FP to NFP conversions in the hospital industry. In their model, a profit-maximizing FP hospital would sell a facility if the net present value of the sale price is larger than the net present value of running the hospital.…”

“…In the first case, NFPs would convert to access capital markets that are only available to FPs (Gray, 1997;Hollis, 1997;Cutler and Horwitz, 2000;Sloan et al, 2003 of NFPs legally restricts the use of these profits to promotion of the organization's mission. Therefore, conversion to FP status could be used to access these profits and distribute them to stakeholders (Goddeerus and Weisbrod, 1998).…”

“…Most work that studies the reasons for conversions focuses on case studies or descriptive statistics and is largely restricted to the hospital and health maintenance organization industries. 1 The few papers that empirically test the causes of conversion found that facilities that converted have lower profit margins and are in more competitive markets (Sloan, Ostermann, and Conover, 2003;Mark, 1999;Castle, 2005), but these papers do not specifically study the choice to convert after a significant change in the market.…”