An early view of the impact of deregulation and managed care on hospital profitability and net worth

This study shows the impact of the removal of hospital rate regulation foll owed by the growth of managed care on hospitals' profitability and net wort h. New Jersey emerged from a regulated prospective payment system in 1992. The transition to a freely competitive market structure had a negative impa ct on hospital profitability, net worth, patient length of stay, and other measures of capacity utilization. Similarly, the doubling of the HMO penetr ation rate in the state between 1995 and 1997 is shown to have negatively i nfluenced hospital financial viability. Hospitals have responded in part by increasing usage of outpatient services. The use of discounted fee-for-ser vice instead of per diem reimbursement for outpatient services provides an incentive for hospitals to favor outpatient over inpatient services. The ef fect of these changes is detailed, along with data showing that the larger discounts given by hospitals to managed care organizations, Medicare, and M edicaid played an important role in explaining the diminished profitability of hospitals.