Hospitals Perform Best In Networks Featuring Financial Risk-Sharing, UB Study Finds

BUFFALO, N.Y. -- Hospitals looking to join a health-care network can expect to attain operating margins 12 percent higher if they join a network with financial risk-sharing arrangements rather than a network without such arrangements, a UB study of hospitals in New York State has shown.

Hospitals also performed best in networks that had relatively loose rules governing relations between members -- which might allow more flexibility in response to changes in the organization's environment -- and in arrangements in which the number of shared activities between members was limited to a select few.

The study, headed by Eric Nauenberg, Ph.D., UB assistant professor of social and preventive medicine and a specialist in health economics, appears in the current issue of the quarterly Medical Care Research and Review.

"As the biggest players in health-care networks, hospitals should take note of these findings," Nauenberg said. "The structural features of a network make a difference; merely forming or joining a network does not insure financial health. Financial risk-sharing proved to be an essential component for improving hospital financial performance in that it tightens the incentive to move forward and work together."

Health networks -- organizations that are linked, but with each member maintaining its own identity and governance -- aren't new. What is new, Nauenberg noted, is their rapid growth.

"At one time, networking was undertaken by insurers and health maintenance organizations as a conduit through which comprehensive services could be covered," he said. "Providers are behind the most recent drive to form networks as a way to guarantee patient flow, improve the continuum of care and spread financial risk."

Nauenberg and colleagues from the UB Department of Social and Preventive Medicine hypothesized that hospitals in highly integrated, highly complex networks that included risk-sharing would prove to be the best performers.

Integration refers to how loosely or tightly the member organizations are controlled. Complexity refers to the number of activities, such as lobbying, financial services, marketing, credentialing, recruitment and education, that are performed by more than one network member. Financial risk-sharing might be characterized as "all for one and one for all." In such networks, financially strong members would provide funds for financially troubled members.

To test their hypotheses, the researchers surveyed 64 New York State hospitals involved in networks and analyzed each hospital's financial performance, based on information from 1991-95. Performance measures used were operating margin, or net profit; "throughput" or discharges-per-bed-day, and hospital costs, defined as expenses-per-patient-day.

Hospitals in moderately integrated, minimally complex networks turned out to be the best performers, with risk-sharing an essential component for success.

"The U.S. government has identified networks as a potential mechanism to improve the economic organization of health-care delivery," Nauenberg said. "The hope is that networks will improve the financial strength of health-care-delivery systems, improve access to those systems and contain costs.

"This study provides information about which network structures are best in terms of lowering the growth of costs and improving financial performance. However, future research needs to assess the impact of networks on access to care."

Also participating in the study were Carol S. Brewer, Ph.D., UB assistant professor of nursing; Jason W. Osborne, former UB graduate student now at the University of Oklahoma, and UB graduate students Kisalaya Basu and Mary K. Bliss.

The study was supported by grants from the federal Office of Rural Health, the U.S. Department of Health and Human Services, and the New York State Department of Health.