Journal of Community Health Vol. 4, No. 1, Fall 1978
C O N S O L I D A T I O N OF C O M M U N I T Y HOSPITALS Bruce R. N e u m a n n , PH.D., D. Michael Harms, M.B.A., and Daniel K. Bloomfield, M.D.
ABSTRACT: The largest component of U.S. health care expenditures is the cost of hospital care. Evidence seems to indicate that community hospital costs can be reduced through the consolidation of some, or even all, hospital services. Although no discernible set of relevant minimal costs for the hospital industry has been established as yet, .significant economies of scale can be attributed to the consolidation process. In addition to potential economic benefits, medical benefits can also accrue to the community as well when inefficient, low-volume services are combined to provide more attractive resources to highly qualified specialists. Many independent community hospitals operate autonomously, often to the detriment of community health needs and economy. Those hospitals that fail to take advantage of the opportunities offered by consolidation may not be keeping faith with the population they claim to serve. C o m m u n i t y hospitals, d e f i n e d by the American Hospital Association as "All n o n f e d e r a l s h o r t - t e r m general and o t h e r special hospitals, excluding hospital units o f institutions whose facilities and services are available to the general public ''1 are, by their nature, shy o f consolidating---of losing their identity. T h e y have f r e q u e n t l y been the products o f self-help, bootstrap operations that have grown away f r o m their h u m b l e beginnings on a c o r n e r lot into shining structures with multimillion-dollar budgets. U n f o r t u n a t e l y , the t e r m " o u r hospital" has been t r a n s f o r m e d and obscured by the terms "growth," "cash flow," and "comprehensive c a r e " I t h e j a r g o n o f today's planners who view the hospital as an i n d e p e n d e n t c o r p o r a t e structure in a competitive world. In communities where hospitals share o v e r l a p p i n g patient service areas, there has b e e n little evidence to show that their planning g r o u p s have w o r k e d closely with each o t h e r in providing the public with the best mix o f health services. More evident have b e e n the competitive feuds that have pitted institutions against each other, as each vied for a greater share o f public acclaim. T o o often hospital decisions have b e e n based on the ego structure o f their boards o f trustees r a t h e r than on rational decision-making processes, on their instincts for their hospital's economic advantage, r a t h e r than on the community's health needs. However, now that there is legislative interest in health care costs, rate reviews, Certificates o f Need, Health Systems Agencies, and o t h e r regulatory bodies, it would behoove those hospitals that have o v e r l a p p i n g responsibilities to set aside their differences and to look carefully at the potential benefits to be From the School of Basic Medical Sciences, College of Medicine, University"of Illinois, Urbana, Illinois 61801. Dr. Neumann is Assistant Professor of Accounting in the College of Business & Administration, University of Colorado, Boulder, Colorado 80309. Mr. Harms is with the School of Basic Medical Sciences, and Dr. Bloomfield is Dean of the School of Basic Medical Sciences. 0094-5145/78/1500-0073500.95 © 1978 Human Sciences Press
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gained from the consolidation of some or all services. P.L. 93-641, the National Health Planning and Resources Development Act of 1974, flatly mandates as a national health priority "The development of multi-institutional systems for the coordination or the consolidation of institutional health services." It is our intent to demonstrate that, in many instances, consolidation or steps toward merger are long overdue and that they are an important step towards meeting the rising expectations of the public and in most cost-efficient manner. In other words, we intend to show that the terms "consolidation" and "merger", which now have a ring of failure and defeat connected with them, can present new opportunities for growth and increased services in the future. We will do this by a review of the existing literature, by reporting the results of interviews with administrators of hospitals that have consolidated services or have merged, and by our conclusions from these data. Hospitals once were the independent, self-made corporate structures that their trustees envisioned. Today, that may no longer be the case. Stimulated by Hill-Burton funds and generous third-party payers, particularly the federal government in the Medicare and Medicaid programs, the hospitals have figuratively become addicted to an affluent life style, attempting to provide all services to all people. In 1940, 70% of the cash flow of community hospitals was provided by direct patient payments and the generosity of benefactors. In 1976, less than 35% of their income comes from these sources. The benefactor who once donated million dollars may have truly sustained the hospital, but the one who gives the same amount in 1977 may only fantasize that he sustains the hospital, for more than likely such a gift is merely absorbed into a muhimillion-dollar budget, with barely a ripple. Because hospitals are so dependent upon third-party payer payments, and because it is nearly impossible for a middle-class citizen to be without hospitialization insurance, that insurance premium has become virtually a tax, which, when added to the tax-supported Medicare and Medicaid, makes all hospitals "tax-supported"--no matter what their claim may be to independence. It would be helpful if the community hospital viewed itself that way and became more openly accountable to the public it serves. Such accountability is noticeably absent when a community has two or more hospitals that provide overlapping services; these hospitals drain resources from the community through the inefficiency of duplication. They also prevent the development of appropriate new resources that could enhance the quality and scope of their services to the public. The decisions made by "independent" hospital trustees in such a community--to build this or to buy that--are, in effect, taxing decisions that affect the health expenditures of every insured person within the area served by the hospital. Harmons points out that "defining the hospital's community and estimating future need for hospital services constitute the most important starting point of the continuous planning process". 2 But in reviewing the consolidations that have been described in the literature we noted that none were based upon such a community plan. The increase in hospital costs that are related to the purchase of any one item or service may not be large individually, but collectively each decision contributes to the overall hospital expense and
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ultimately plans its own role in the inflation of health care costs. The Social Security Administration figures for 1976 show hospital charges rising at an annual rate of 13.4% and the hospital bill for 1977 will probably exceed $55 billion! 3 It remains to be seen whether the Carter Administration's proposed cap on hospital revenues will be effective. Furthermore, hospitals are constantly being faced with the dilemma of what needs to respond to, and how, in a society characterized by rapid change and growth. Regardless of the costs of expansion, hospitals must realize that there is a finite limit to their resources and that this limit will conflict with their notions of "comprehensive" and "quality" care for all patients. The difficulties posed in making resource allocations on the basis of the current fee-for-service system, which responds to the perceived needs of patients, physicians, institutions, insurers, regulators, and government, has been dramatically emphasized by Havighurst and Blumstein4; and the choices that are realistically available will seem arbitrary indeed if we are to give credence to the beliefs of Haggerty 5 or Carlson. 6 Haggerty has concluded that "There is not much evidence that illness care (which is what most medical care consists of) reduces mortality or morbidity very much." Carlson believes that medical care influences the health of society only to the extent of 6% and this should be compared with the contributions that may be gained from improvements in genetics, environment, society, and people's life styles. To examine the issue of hospital consolidation in detail, the authors reviewed the existing literature and interviewed a number of principals who were experienced in the areas of hospital finance and consolidation. These included several representatives of a state hospital associaton, two hospital administrators who have worked through the process of consolidation, and representatives of two muhihospital organizations in Minneapolis. One difficulty encountered was that the literature on hospital consolidation is replete with generalities but very short on specific data. On the other hand, although the interviewees were often able to provide a larger amount of specific data, even that information was difficult to verify because actual accounting statements were unavailable. Despite this impediment, it was concluded that it was both possible and important to bring the issues related to hospital consolidation into focus. We have done this by briefly summarizing the general considerations for the process and analyzing in more detail its potential benefits and disadvantages.
GENERAL CONSIDERATIONS
Health service consolidation ranges from cooperative agreements between institutions regarding specialized equipment to the complete merger of institutions into a new entity at a new physical location. Between these extremes may be found: shared services, affiliations, cooperatives or joint ventures, satellites, multiple units under single management, and mergers of management, services, location.
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It is beyond the scope of this paper to review the details that relate to each of these types of consolidations. However, a review of the general considerations appropriate to any type of consolidation may be useful: 1. What will be the impact of the consolidation on the organization of the surviving institutions? What revisions in the organizational structure will be required? What changes in personnel and staffing will be required? 2. What are the legal barriers to the consolidation Are there restrictive covenants in debt or bond indenture agreements, or even federal regulations that may prohibit a change in ownership? 3. What is the impact of the consolidation on the availability of health services within the community? What is the impact on the various publics serving and served by the hospitals? Has an analysis of the forces supporting and opposing consolidation been made? 4. What is the economic impact of the consolidation? Has a detailed forecast of incremental costs and revenues preceded the commitment to consolidation? Attendant to the general considerations is a thorough understanding of the potential benefits and disadvantages of consolidation.
BENEFITS OF CONSOLIDATION
The potential benefits of consolidation lie in two major areas: an increase in the quality of care and a reduced cost of service. Because quality is difficult to measure, it is subject to much dispute. ~ In one area, however, that of open-heart surgery, the failure to provide quality has probably been translated directly into increased morbidity; but even this is difficult to document with any certainty. In 1971, Platt and Grossman charged that "It is self-evident that costs per procedure are higher in hospitals where the volume of cardiac surgery is low. Even more important, the quality of care almost certainly declines . . . . As a result of this fiasco, the cost of cardiac surgery, as well as the morbidity and mortality, has been excessive. ''8 There is an understandable reluctance on the part of authors to publish "low quality" results. Instead, the literature contains strong inferences that emphasize the importance of optimal criteria for care 9 and optimal resources "for safe and effective cardiac surgery". 1° Hiatt summarized his position by saying, "The drawbacks of regionalization seem trivial when compared, first, to the medical advantage of having such complicated procedures carried out by specialists whose skills are honed on a continuous basis and, second, to the obvious economic benefits. ''11 The sad experience of having too many openheart surgery units performing too few operations at a higher cost and at a higher risk has become a chronic disease from which the health care industry is only now recovering. The circumstantial evidence is overwhelming that the quality of care improves when the consolidation of open-heart surgery facilities leads to an appropriate volume of sustained service. Is the prima facie case for open-heart surgery an exception or a prototype? In our opinion, it is a prototype. The ingredients that make up quality
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open-heart service are: (1) the presence of the most skilled personnel, (2) an adequate volume of patients to sustain the skills and provide the necessary experience to handle the unexpected, and (3) a dedicated e n v i r o n m e n t which can support the service 24 hours a day and which can unequivocally afford to sustain the effort by providing the continuous u p d a t i n g of e q u i p m e n t and methods that are required. These criteria apply to almost all the specialized services a hospital provides: emergency rooms, coronary care, obstetrics, pediatrics and neonatal care, p u l m o n a r y intensive care, laboratories, and a host of others. F u r t h e r m o r e , implicit in and essential to all quality improvement is better management. An increased volume of service does not automatically improve or assure quality m a n a g e m e n t , but it does provide the opportunity and the resources to purchase better professional administration. T h e 1974 report by the Health Research Group, concerning a c o m m u n i t y hospital in Maryland, d o c u m e n t e d a n u m b e r of complaints by the hospital's doctors and nurses that related largely to the administration of its clinical pathology and radiology services: 1. Many laboratory tests were found to be grossly inaccurate, so much so that, instead of being confident enough in an abnormal result to act accordingly, many doctors automatically repeat any test which comes out abnormal so as to avoid a therapeutic mistake. Not infrequently, when such tests are repeated, they are normal the second time. Consequently, some patients are hospitalized longer than needed. 2. Results got back to patients' charts late, causing further delay in diagnosis and treatment. 3. On nights and weekends, results of tests are even more erratic and questionable. 4. Although the technical quality and medical interpretation of x-rays were reported to be satisfactory, the written report of the radiologists' interpretation is often late getting back to the patient's chart, thus delaying diagnosis and treatment. 12 T h e problems noted have broad managerial implications: Items 2 and 4 seem to be a direct result of larger, more complicated organizational problems. However, these problems may be countered by the benefits of more highly trained managers and by providing adequate supervisory services more hours of the day. W h e n laboratory services are consolidated, wellqualified professionals can be hired to provide the managerial and supervisory skills that are essential to high quality productivity, consolidated l a u n d r y operations can afford to maintain better microbial control and monitoring of cross-infection, as was shown in the Northwestern Memorial Hospital. Dietary services can be m a n a g e d more effectively, and other support services, such as social work, occupational therapy, inhalation therapy, and physical therapy, can be u p g r a d e d as a result of the increased volume provided t h r o u g h consolidation. However, as managerial problems are resolved, it will ultimately be the availability of specialized professional help 24 hours a day in the combined and larger institutions that will serve as a principal source for improved quality of care.
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Studies of the improvement in the quality of care that may result from hospital consolidations are few. A major study of 16 consolidated health care systems does not even address the changes in quality that may have resulted from consolidation. 13 This study only compares perceptions of task effectiveness relative to other consolidated systems. The only before-and-after study of the quality of care known to the authors is that of the Samaritan Health Service. The Samaritan Health Service originally involved eight hospitals: four were in the Phoenix area and the other four were in Northern Arizona. The first study of this consolidation, conducted during and immediately after the merger process, found that "the merger appeared to be at least one of the reasons that the various hospitals did institute, improve, and upgrade a great many standards within a short period of time". 14The Samaritan study further indicates that the merger "resulted in some improvements in the comprehensiveness, availability and quality of care provided by hospitals in the system". In summary, closer attention by the hospital industry to the issue of quality of care, particularly when that quality could be improved by various forms of cooperation and consolidation, could help to alleviate the current malpractice crisis. Although it would be difficult to prove a relationship between quality of care and liability costs, some tentative evidence is available. Curran and Mosely disclose that, in the State of Washington in 1972, the major malpractice insurer paid out $1.45 in claims for every $1.00 in premiums paid by independent physicians, as opposed to $0.89 in claims for each $1.00 of premiums paid by the Group Health Cooperative of Puget Sound, a medical group that emphasizes internal quality control? 5 It has also been the experience of a circuit court j u d g e with extensive malpractice tort experience that there is no substitute for quality care in the prevention of malpractice suits. He stated, "The best way to deal with the problem of malpractice is for physicians and hospitals to clean their own houses."16 The litigious climate of 1976 is virtually a public mandate to the health industry, of which hospitals are a major part, to improve its quality control.
T H E E C O N O M I C B E N E F I T S OF C O N S O L I D A T I O N
The potential economic benefits relate to economies of scale and to reductions in capital costs. Identifiable economies of scale may be attributed to five major factorslT: 1. A reduction of excess capacity. 2. Savings through quantity discounts on larger purchase orders; this practice will yield lower costs per unit. One firm estimated that its discount on most items purchased under a group purchase plan averaged 40% to 50%. (However, this may not represent the typical savings that can realistically be expected from most such consolidations.) 3. The specialization of personnel and equipment in specific areas, e.g., the consolidation of some services will release operating and capital funds for other uses.
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4. More available sources for capital financing or lower costs of capital, e.g., a line of credit might be available to a consolidated group of hospitals that would not be available to each hospital individually, or such that each would have had very limited abilities to generate short-term credit. The rate of interest on a long-term debt can be much lower for a consolidated unit than if each unit tried to obtain their proportionate share of funds individually in the capital markets. For example, Health Central, Inc., Minnaepolis, Minnesota, was able to provide interim construction financing out of short-term funds, rather than paying the higher construction loan interest rate. 5. A greater stability of operations. The statistical law of large numbers actually gives rise to economies of scale because the variance of a large sample is usually smaller than the variance of a small sample. Theoretical microeconomics would indicate that there is some optimal level for the size of a hospital for a given level of services. At that level its average operating costs would be minimized. Unfortunately, no one has been able to discern clearly a set of relevant cost minima for the hospital industry. However, all five factors that contribute to economies of scale were identified in the consolidation of hospitals that resulted in Chicago's Northwestern Memorial Hospital and Medical Center, where the distance factor (less than five miles) between the separate units was minimal. Unavoidable excess capacity was found in the separate laboratories; this was reduced when most laboratory functions were centralized into a single facility. This move resulted in lower average costs per test. The consolidation of laboratories permitted the introudction of new equipment and new procedures that were much more highly specialized than that of the separate units could afford previously. Lower costs on purchased items were achieved, utility rates were lowered, food costs were reduced, laundry costs per pound were reduced, and plant engineering costs were cut. More stable nursing and personnel patterns were achieved. A radiocontrolled triage-type of patient management and scheduling system was established between each of the emergency departments. Police and fire departments and the ambulance companies found it advantageous to participate in the system. Business office and other overhead costs were reduced. Lower interest rates and other concessions were obtained from the banks. The debt capacity of the consolidated hospitals was higher than the simple sum of the individual lines of credit previously outstanding. The statistical law of large numbers was observed, in that fluctuations in the cash flow were reduced and the investment in working capital could be correspondingly reduced. It is probable that similar economies would result from most consolidations of services where the distance factor was favorable. There are several other reports of significant economies of scale that can be attributed to the consolidation process. The Arizona hospitals that formed the Samaritan Health Service had identifiably lower average dietary costs, purchasing and material management costs, and personnel administration costs, i8 Centralized purchasing for two New Jersey hospitals resulted in first-year savings of $163,000 out of a $6 million volume.19 The Lutheran Hospital Society of Souther
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California saved $1,158,000 by avoiding certain duplicate services and facilities and another $1,820,000 through identifiable economies of scale, a saving of approximately 6% of annual operating costs. 2° Many other reports could be cited now that multihospital systems have begun to publish these types of savings. In order to verify that these economies can apply to smaller hospitals and to two- or three-unit systems, the authors visited the Passavant Memorial Hospital at Jacksonville, Illinois. This consolidation of two 150-bed hospitals resulted in a $300,000 saving (per year) out of the combined operating budgers of approximately $5 million. Another economic effect of the Northwestern Memorial Hospital consolidation has been the benefits of improved personnel administration. In private communications, we have been assured that the consolidation of operations was followed eventually by better overall institutional management. The benefits were not always immediately apparent because of the presence of tenured individuals, but a long-range benefit was argued strongly by our sources. Generally speaking, the quality of administration should be improved as the more effective manager assumes control of the consolidated department (or is hired from outside the organization). This will benefit personnel policies to the extent that there will be a better quality of staff, more effective staffing patterns, better training programs, and a reduced turnover. Performance standards with respect to quality and output can also be raised. O f course, there may be a corresponding increase in costs, as wages and fringe benefits are standardized (equalized) across the various institutions, but the Northwestern Memorial experience indicated that the cost-savings aspects that resulted from the lower turnover and the better training more than offset the additional costs due to higher wages and fringe benefits. In addition, it has been their experience that the cumulative effect of all these aspects of personnel administration has served to attract better qualified individuals to the hospital. Economies of scale may not be realized immediately upon consolidation. They can be obscured by general inflationary increases or by the increased costs of expanded and new services. The lag time in identifying economies of scale due to consolidation has been confirmed empirically, using a theoretical model of the influence of hospital merger on average costs. 14 Holding all other factors constant, average costs are expected to rise after an adjustment period. The length of the adjustment period is variable, depending upon how long it takes to implement acceptable revisions in the organizational structure and in the management procedures that will ultimately result in cost reductions. After the adjustment period, average costs are reduced below the average costs for a comparable group of hospitals. When the model was applied to eight multihospital systems that had consolidated after 1962, the postulated theory regarding the postmerger differences in average costs held in all but one case. 14 The study of the Samaritan Health Service (Arizona), which resulted from a more recent merge r, also provided confirmation of the model. TM Therefore, it cannot be expected that economies of scale due to a consolidation of services will manifest themselves immediately.
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The initial start-up costs and the related costs of coordination and control may result in higher average costs during the immediate postmerger period. Capital savings are also possible because the consolidated unit may have more resources available to it to proceed with capital development, related to improvements in quality, which none of the units could afford individually. Nevertheless, hospital consolidation can also alleviate the pressure for new construction by providing the means for a more efficient utilization of beds. An additional reason that shared or consolidated services may offer capital savings is that off-site construction may become possible for various support and ambulatory services. The potential advantages of off-site construction include the following21: 1. New construction can be located on less expensive land, at an optimal distance from each of the parent facilities. 2. Construction would be at a lower cost than would be true for facilities located within the hospital. 3. Freeing space within the hospital may (a) Improve functional relationships, or (b) Increase operating efficiency, or both. 4. Renovation of hospital space may be possible at a lower cost than if similar new facilities were constructed. 5. A better selection of location is permitted for potential employees, thus reducing recruitment and turnover costs. 6. Expansion may be undertaken without disruption of existing patient care operations of the hospital(s). 7. Off-site construction may foster better community relations for the hospital. There are numerous examples of hospital consolidations that demonstrate substantial savings of capital funds. The consolidation "of a children's hospital with a medical center in California enabled the medical center to avoid spending almost $4 million in capital funds, zz In Cincinnati, Ohio, three hospitals made 260 beds available by dropping their obstetric departments; 220 of these beds were later converted to use for medical-surgical patients, and $18 million in new-bed construction was avoided. 12 Two Denver area hospitals consolidated their pediatric and obstetric departments in order to bring cost savings and better patient care to their communities. One hospital agreed to take all obstetric cases, while the other assumed responsibility for all pediatric services. By closing down its pediatric beds, the first hospital was able to avoid the costs of a new 20-bed orthopedic unit--about $700,000. The other hospital converted its former obstetric facilities into an outpatient surgery center and a 24-bed adolescent unit/3
POTENTIAL DISADVANTAGES OF C O N S O L I D A T I O N
A major obstacle to consolidation lies in the social costs of overcoming the inertia of corporate structures that prefer to be independent. There is also a political risk involved when one disturbs the status quo--a risk that may be
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lessened as public attitudes change. Nevertheless, because rate-review and prospective reimbursement schemes will probably be increasingly employed by third-party payers within the next decade, it would behoove hospital trustees to experiment now--while they still have the freedom to do so. A second observation is that costs may increase after consolidation, raising the spectre of unrealized expectations. The Northwestern Memorial experience showed that, while unit costs for laboratory services were reduced, the availability of a wider variety of laboratory tests produced increased utilization of the more effective laboratory services and, therefore, increased total costs. It would appear then that the consolidation produced a higher quality of care (if one assumes that breadth and intensity of laboratory testing is synonymous with quality care) at some increase in total cost, despite the lowered unit cost. It has not generally been the experience of the hospital industry that larger hospitals reduce costs. Just the opposite has been true? However, this pattern of costs has developed during a period in which hospitals were reimbursed by third-party payers on the basis of "reasonable costs", an open-ended formula with a built-in incentive to spend. Large community hospitals, and university-based hospitals in particular, had no incentive to use their size in the most cost-effective manner. In fact, they had a disincentive, which led many of them to assume the leadership in providing every new service that was developed, regardless of cost. Many smaller community hospitals tended to imitate this process, a trend which has only recently been identified, much less reversed. It remains to be seen whether a tertiary care center will be permitted to continue to charge an obstetrical patient $200 per day when the same delivery and quality of care can be provided elsewhere for $100 per day. A very difficult factor that mitigates against cooperative efforts is the one of economic risk. If Hospital A, with an 80% medical-surgical occupancy, closes its emergency room in favor of Hospital B, Hospital A may find its occupancy rate reduced to 70%, while Hospital B's rate increases. The solution to this problem is not easy and must lie in the negotiation process. However, if the consolidation of emergency rooms results in cost savings and an improvement in quality of care, Hospitals A and B are morally obligated to resolve the problem. Otherwise, despite pious protestations to the contrary, they are condemning their patients to inferior care at higher cost. Finally, the consolidation of services cannot be done without some dislocation of personnel. Aside from the political disadvantage of requiring professionals to perform their services in unfamiliar surroundings, there can be a more serious problem--that of the expenses related to the travel or transportation for professionals, patients, and supplies. Before any consolidation steps are taken, the possibility of a significant increase in travel costs should be thoroughly examined. However, two studies of regional hospital operations indicate that travel costs, and the costs related to travel time, will not be materially affected by changes in location--up to six miles in an urban community and perhaps twice that distance outside the city. 24,25
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REFERENCES 1. American Hospital Association: Hospital Statistics: 1976 Edition. Chicago, American Hospital Association, 1976. 2. Harmons GJ: Start planning by defining the community, its future needs. Hospitals 50:105-112, 1976. 3. Turbyville C (exec ed): Editorial. The Blue Sheet, vol 20, no 1, p 3, 1977. 4. Havighurst CC, Blumstein JF: Coping with quality cost tradeoffs in medical care: The role ot PSROs. Northwestern University Law Review 70:6-68, 1975. 5. Haggerty RJ: The boundaries of health care. Pharos, July 1972, pp 106-111. 6. Carlson RJ: Alternative legislative strategies for licensure: Licensure and health. Presented at the Conference on Quality Assurance in Hospitals, Boston University, Program on Public Policy for Quality Health Care, November 21-22, 1975. 7. McNerney wJ: The quandary of quality assessment. N EnglJ Med 295:1505-1511, 1976. 8. Platt RD, Grossman JB: Utilization of facilities for heart surgery (correspondence). N EnglJ Med 284:1386-1387, 1971. 9. Likoff WA, Chairman, Heart Disease Advisory Committee: Optimal criteria for care of heart disease patients.JAMA 226:1340-1344, 1973. 10. Scannell JG, Brown GE, Buckley MJ, etal: Report of the inter-society commission for heart disease resources. Optimal resources for cardiac surgery. Guidelines for program planning and evaluation. Circulation 50: no 5, A-23-A-41, 1975. 11. Hiatt HH: Protecting the medical commons: Who is responsible? N EnglJ Med 293:235-241, 1975. 12. Ensminger B: The $8 Billion Hospital Bed Overrun. Washington, DC, Health Research Group, 1975. 13. Money WH, Gilfallen DP, Duncan R: A comparative study of multi-unit health care organizations. In Organizational Research in Hospitals. Chicago, Blue Cross Association, 1976. Pp 29-61. 14. Cooney JP, Alexander TL: Multihospital Systems: An Evaluation, Part One: Overview. Chicago, Health Services Research Center, 1975. 15. Curran WJ, Mosely GB III: The malpractice experience of health maintenance organizations, Northwestern University Law Review 70:69-89, 1975. 16. Cartel D: Malpractice issues in Illinois. An address to the Champaign County Medical Society, Nov. 11, 1976. 17. May J: Economic variables in hospital mergers. In DB Starkweather (ed): ,~nalysis of Hospital Mergers---Conference Proceedings, Rockville, Maryland, National Center for Health Services Research and Development, October, 1971. 18. Neumann BR: A financial analysis of a hospital merger: Samaritan health service. Med Care 12:983-998, 1974. 19. Owen JW: Wide-range sharing for two hospitals. Hospitals 48:105 1973. 20. Tibbits SJ: Multiple hospital systems. Hosp Admin Spring 1973, pp 10-20. 21. Cook HF: Shared services--complex but rewarding. Hospitals 47:87-87, 1973. 22. Levering RS: Links to medical center allow children's hospital to provide more services at lower cost. Mod Hosp, August 1973, pp. 57-60. 23. New ways to drive down hospital costs. U.S. News and World Report, February 18, 1974, pp 58-60. 24. Robinette TK: The small hospital and the areawide planning agency: A basis for constructive dialogue. Am J Public Health 62:1590-1595, 1972. 25. Presbyterian Hospital Center: Report of the Study of a Base-Satellite Hospital System. Albuquerque, Presbyterian Hospital Center, 1974.
C O N S O L I D A T I O N OF C O M M U N I T Y HOSPITALS Bruce R. N e u m a n n , PH.D., D. Michael Harms, M.B.A., and Daniel K. Bloomfield, M.D.
ABSTRACT: The largest component of U.S. health care expenditures is the cost of hospital care. Evidence seems to indicate that community hospital costs can be reduced through the consolidation of some, or even all, hospital services. Although no discernible set of relevant minimal costs for the hospital industry has been established as yet, .significant economies of scale can be attributed to the consolidation process. In addition to potential economic benefits, medical benefits can also accrue to the community as well when inefficient, low-volume services are combined to provide more attractive resources to highly qualified specialists. Many independent community hospitals operate autonomously, often to the detriment of community health needs and economy. Those hospitals that fail to take advantage of the opportunities offered by consolidation may not be keeping faith with the population they claim to serve. C o m m u n i t y hospitals, d e f i n e d by the American Hospital Association as "All n o n f e d e r a l s h o r t - t e r m general and o t h e r special hospitals, excluding hospital units o f institutions whose facilities and services are available to the general public ''1 are, by their nature, shy o f consolidating---of losing their identity. T h e y have f r e q u e n t l y been the products o f self-help, bootstrap operations that have grown away f r o m their h u m b l e beginnings on a c o r n e r lot into shining structures with multimillion-dollar budgets. U n f o r t u n a t e l y , the t e r m " o u r hospital" has been t r a n s f o r m e d and obscured by the terms "growth," "cash flow," and "comprehensive c a r e " I t h e j a r g o n o f today's planners who view the hospital as an i n d e p e n d e n t c o r p o r a t e structure in a competitive world. In communities where hospitals share o v e r l a p p i n g patient service areas, there has b e e n little evidence to show that their planning g r o u p s have w o r k e d closely with each o t h e r in providing the public with the best mix o f health services. More evident have b e e n the competitive feuds that have pitted institutions against each other, as each vied for a greater share o f public acclaim. T o o often hospital decisions have b e e n based on the ego structure o f their boards o f trustees r a t h e r than on rational decision-making processes, on their instincts for their hospital's economic advantage, r a t h e r than on the community's health needs. However, now that there is legislative interest in health care costs, rate reviews, Certificates o f Need, Health Systems Agencies, and o t h e r regulatory bodies, it would behoove those hospitals that have o v e r l a p p i n g responsibilities to set aside their differences and to look carefully at the potential benefits to be From the School of Basic Medical Sciences, College of Medicine, University"of Illinois, Urbana, Illinois 61801. Dr. Neumann is Assistant Professor of Accounting in the College of Business & Administration, University of Colorado, Boulder, Colorado 80309. Mr. Harms is with the School of Basic Medical Sciences, and Dr. Bloomfield is Dean of the School of Basic Medical Sciences. 0094-5145/78/1500-0073500.95 © 1978 Human Sciences Press
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gained from the consolidation of some or all services. P.L. 93-641, the National Health Planning and Resources Development Act of 1974, flatly mandates as a national health priority "The development of multi-institutional systems for the coordination or the consolidation of institutional health services." It is our intent to demonstrate that, in many instances, consolidation or steps toward merger are long overdue and that they are an important step towards meeting the rising expectations of the public and in most cost-efficient manner. In other words, we intend to show that the terms "consolidation" and "merger", which now have a ring of failure and defeat connected with them, can present new opportunities for growth and increased services in the future. We will do this by a review of the existing literature, by reporting the results of interviews with administrators of hospitals that have consolidated services or have merged, and by our conclusions from these data. Hospitals once were the independent, self-made corporate structures that their trustees envisioned. Today, that may no longer be the case. Stimulated by Hill-Burton funds and generous third-party payers, particularly the federal government in the Medicare and Medicaid programs, the hospitals have figuratively become addicted to an affluent life style, attempting to provide all services to all people. In 1940, 70% of the cash flow of community hospitals was provided by direct patient payments and the generosity of benefactors. In 1976, less than 35% of their income comes from these sources. The benefactor who once donated million dollars may have truly sustained the hospital, but the one who gives the same amount in 1977 may only fantasize that he sustains the hospital, for more than likely such a gift is merely absorbed into a muhimillion-dollar budget, with barely a ripple. Because hospitals are so dependent upon third-party payer payments, and because it is nearly impossible for a middle-class citizen to be without hospitialization insurance, that insurance premium has become virtually a tax, which, when added to the tax-supported Medicare and Medicaid, makes all hospitals "tax-supported"--no matter what their claim may be to independence. It would be helpful if the community hospital viewed itself that way and became more openly accountable to the public it serves. Such accountability is noticeably absent when a community has two or more hospitals that provide overlapping services; these hospitals drain resources from the community through the inefficiency of duplication. They also prevent the development of appropriate new resources that could enhance the quality and scope of their services to the public. The decisions made by "independent" hospital trustees in such a community--to build this or to buy that--are, in effect, taxing decisions that affect the health expenditures of every insured person within the area served by the hospital. Harmons points out that "defining the hospital's community and estimating future need for hospital services constitute the most important starting point of the continuous planning process". 2 But in reviewing the consolidations that have been described in the literature we noted that none were based upon such a community plan. The increase in hospital costs that are related to the purchase of any one item or service may not be large individually, but collectively each decision contributes to the overall hospital expense and
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ultimately plans its own role in the inflation of health care costs. The Social Security Administration figures for 1976 show hospital charges rising at an annual rate of 13.4% and the hospital bill for 1977 will probably exceed $55 billion! 3 It remains to be seen whether the Carter Administration's proposed cap on hospital revenues will be effective. Furthermore, hospitals are constantly being faced with the dilemma of what needs to respond to, and how, in a society characterized by rapid change and growth. Regardless of the costs of expansion, hospitals must realize that there is a finite limit to their resources and that this limit will conflict with their notions of "comprehensive" and "quality" care for all patients. The difficulties posed in making resource allocations on the basis of the current fee-for-service system, which responds to the perceived needs of patients, physicians, institutions, insurers, regulators, and government, has been dramatically emphasized by Havighurst and Blumstein4; and the choices that are realistically available will seem arbitrary indeed if we are to give credence to the beliefs of Haggerty 5 or Carlson. 6 Haggerty has concluded that "There is not much evidence that illness care (which is what most medical care consists of) reduces mortality or morbidity very much." Carlson believes that medical care influences the health of society only to the extent of 6% and this should be compared with the contributions that may be gained from improvements in genetics, environment, society, and people's life styles. To examine the issue of hospital consolidation in detail, the authors reviewed the existing literature and interviewed a number of principals who were experienced in the areas of hospital finance and consolidation. These included several representatives of a state hospital associaton, two hospital administrators who have worked through the process of consolidation, and representatives of two muhihospital organizations in Minneapolis. One difficulty encountered was that the literature on hospital consolidation is replete with generalities but very short on specific data. On the other hand, although the interviewees were often able to provide a larger amount of specific data, even that information was difficult to verify because actual accounting statements were unavailable. Despite this impediment, it was concluded that it was both possible and important to bring the issues related to hospital consolidation into focus. We have done this by briefly summarizing the general considerations for the process and analyzing in more detail its potential benefits and disadvantages.
GENERAL CONSIDERATIONS
Health service consolidation ranges from cooperative agreements between institutions regarding specialized equipment to the complete merger of institutions into a new entity at a new physical location. Between these extremes may be found: shared services, affiliations, cooperatives or joint ventures, satellites, multiple units under single management, and mergers of management, services, location.
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It is beyond the scope of this paper to review the details that relate to each of these types of consolidations. However, a review of the general considerations appropriate to any type of consolidation may be useful: 1. What will be the impact of the consolidation on the organization of the surviving institutions? What revisions in the organizational structure will be required? What changes in personnel and staffing will be required? 2. What are the legal barriers to the consolidation Are there restrictive covenants in debt or bond indenture agreements, or even federal regulations that may prohibit a change in ownership? 3. What is the impact of the consolidation on the availability of health services within the community? What is the impact on the various publics serving and served by the hospitals? Has an analysis of the forces supporting and opposing consolidation been made? 4. What is the economic impact of the consolidation? Has a detailed forecast of incremental costs and revenues preceded the commitment to consolidation? Attendant to the general considerations is a thorough understanding of the potential benefits and disadvantages of consolidation.
BENEFITS OF CONSOLIDATION
The potential benefits of consolidation lie in two major areas: an increase in the quality of care and a reduced cost of service. Because quality is difficult to measure, it is subject to much dispute. ~ In one area, however, that of open-heart surgery, the failure to provide quality has probably been translated directly into increased morbidity; but even this is difficult to document with any certainty. In 1971, Platt and Grossman charged that "It is self-evident that costs per procedure are higher in hospitals where the volume of cardiac surgery is low. Even more important, the quality of care almost certainly declines . . . . As a result of this fiasco, the cost of cardiac surgery, as well as the morbidity and mortality, has been excessive. ''8 There is an understandable reluctance on the part of authors to publish "low quality" results. Instead, the literature contains strong inferences that emphasize the importance of optimal criteria for care 9 and optimal resources "for safe and effective cardiac surgery". 1° Hiatt summarized his position by saying, "The drawbacks of regionalization seem trivial when compared, first, to the medical advantage of having such complicated procedures carried out by specialists whose skills are honed on a continuous basis and, second, to the obvious economic benefits. ''11 The sad experience of having too many openheart surgery units performing too few operations at a higher cost and at a higher risk has become a chronic disease from which the health care industry is only now recovering. The circumstantial evidence is overwhelming that the quality of care improves when the consolidation of open-heart surgery facilities leads to an appropriate volume of sustained service. Is the prima facie case for open-heart surgery an exception or a prototype? In our opinion, it is a prototype. The ingredients that make up quality
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open-heart service are: (1) the presence of the most skilled personnel, (2) an adequate volume of patients to sustain the skills and provide the necessary experience to handle the unexpected, and (3) a dedicated e n v i r o n m e n t which can support the service 24 hours a day and which can unequivocally afford to sustain the effort by providing the continuous u p d a t i n g of e q u i p m e n t and methods that are required. These criteria apply to almost all the specialized services a hospital provides: emergency rooms, coronary care, obstetrics, pediatrics and neonatal care, p u l m o n a r y intensive care, laboratories, and a host of others. F u r t h e r m o r e , implicit in and essential to all quality improvement is better management. An increased volume of service does not automatically improve or assure quality m a n a g e m e n t , but it does provide the opportunity and the resources to purchase better professional administration. T h e 1974 report by the Health Research Group, concerning a c o m m u n i t y hospital in Maryland, d o c u m e n t e d a n u m b e r of complaints by the hospital's doctors and nurses that related largely to the administration of its clinical pathology and radiology services: 1. Many laboratory tests were found to be grossly inaccurate, so much so that, instead of being confident enough in an abnormal result to act accordingly, many doctors automatically repeat any test which comes out abnormal so as to avoid a therapeutic mistake. Not infrequently, when such tests are repeated, they are normal the second time. Consequently, some patients are hospitalized longer than needed. 2. Results got back to patients' charts late, causing further delay in diagnosis and treatment. 3. On nights and weekends, results of tests are even more erratic and questionable. 4. Although the technical quality and medical interpretation of x-rays were reported to be satisfactory, the written report of the radiologists' interpretation is often late getting back to the patient's chart, thus delaying diagnosis and treatment. 12 T h e problems noted have broad managerial implications: Items 2 and 4 seem to be a direct result of larger, more complicated organizational problems. However, these problems may be countered by the benefits of more highly trained managers and by providing adequate supervisory services more hours of the day. W h e n laboratory services are consolidated, wellqualified professionals can be hired to provide the managerial and supervisory skills that are essential to high quality productivity, consolidated l a u n d r y operations can afford to maintain better microbial control and monitoring of cross-infection, as was shown in the Northwestern Memorial Hospital. Dietary services can be m a n a g e d more effectively, and other support services, such as social work, occupational therapy, inhalation therapy, and physical therapy, can be u p g r a d e d as a result of the increased volume provided t h r o u g h consolidation. However, as managerial problems are resolved, it will ultimately be the availability of specialized professional help 24 hours a day in the combined and larger institutions that will serve as a principal source for improved quality of care.
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Studies of the improvement in the quality of care that may result from hospital consolidations are few. A major study of 16 consolidated health care systems does not even address the changes in quality that may have resulted from consolidation. 13 This study only compares perceptions of task effectiveness relative to other consolidated systems. The only before-and-after study of the quality of care known to the authors is that of the Samaritan Health Service. The Samaritan Health Service originally involved eight hospitals: four were in the Phoenix area and the other four were in Northern Arizona. The first study of this consolidation, conducted during and immediately after the merger process, found that "the merger appeared to be at least one of the reasons that the various hospitals did institute, improve, and upgrade a great many standards within a short period of time". 14The Samaritan study further indicates that the merger "resulted in some improvements in the comprehensiveness, availability and quality of care provided by hospitals in the system". In summary, closer attention by the hospital industry to the issue of quality of care, particularly when that quality could be improved by various forms of cooperation and consolidation, could help to alleviate the current malpractice crisis. Although it would be difficult to prove a relationship between quality of care and liability costs, some tentative evidence is available. Curran and Mosely disclose that, in the State of Washington in 1972, the major malpractice insurer paid out $1.45 in claims for every $1.00 in premiums paid by independent physicians, as opposed to $0.89 in claims for each $1.00 of premiums paid by the Group Health Cooperative of Puget Sound, a medical group that emphasizes internal quality control? 5 It has also been the experience of a circuit court j u d g e with extensive malpractice tort experience that there is no substitute for quality care in the prevention of malpractice suits. He stated, "The best way to deal with the problem of malpractice is for physicians and hospitals to clean their own houses."16 The litigious climate of 1976 is virtually a public mandate to the health industry, of which hospitals are a major part, to improve its quality control.
T H E E C O N O M I C B E N E F I T S OF C O N S O L I D A T I O N
The potential economic benefits relate to economies of scale and to reductions in capital costs. Identifiable economies of scale may be attributed to five major factorslT: 1. A reduction of excess capacity. 2. Savings through quantity discounts on larger purchase orders; this practice will yield lower costs per unit. One firm estimated that its discount on most items purchased under a group purchase plan averaged 40% to 50%. (However, this may not represent the typical savings that can realistically be expected from most such consolidations.) 3. The specialization of personnel and equipment in specific areas, e.g., the consolidation of some services will release operating and capital funds for other uses.
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4. More available sources for capital financing or lower costs of capital, e.g., a line of credit might be available to a consolidated group of hospitals that would not be available to each hospital individually, or such that each would have had very limited abilities to generate short-term credit. The rate of interest on a long-term debt can be much lower for a consolidated unit than if each unit tried to obtain their proportionate share of funds individually in the capital markets. For example, Health Central, Inc., Minnaepolis, Minnesota, was able to provide interim construction financing out of short-term funds, rather than paying the higher construction loan interest rate. 5. A greater stability of operations. The statistical law of large numbers actually gives rise to economies of scale because the variance of a large sample is usually smaller than the variance of a small sample. Theoretical microeconomics would indicate that there is some optimal level for the size of a hospital for a given level of services. At that level its average operating costs would be minimized. Unfortunately, no one has been able to discern clearly a set of relevant cost minima for the hospital industry. However, all five factors that contribute to economies of scale were identified in the consolidation of hospitals that resulted in Chicago's Northwestern Memorial Hospital and Medical Center, where the distance factor (less than five miles) between the separate units was minimal. Unavoidable excess capacity was found in the separate laboratories; this was reduced when most laboratory functions were centralized into a single facility. This move resulted in lower average costs per test. The consolidation of laboratories permitted the introudction of new equipment and new procedures that were much more highly specialized than that of the separate units could afford previously. Lower costs on purchased items were achieved, utility rates were lowered, food costs were reduced, laundry costs per pound were reduced, and plant engineering costs were cut. More stable nursing and personnel patterns were achieved. A radiocontrolled triage-type of patient management and scheduling system was established between each of the emergency departments. Police and fire departments and the ambulance companies found it advantageous to participate in the system. Business office and other overhead costs were reduced. Lower interest rates and other concessions were obtained from the banks. The debt capacity of the consolidated hospitals was higher than the simple sum of the individual lines of credit previously outstanding. The statistical law of large numbers was observed, in that fluctuations in the cash flow were reduced and the investment in working capital could be correspondingly reduced. It is probable that similar economies would result from most consolidations of services where the distance factor was favorable. There are several other reports of significant economies of scale that can be attributed to the consolidation process. The Arizona hospitals that formed the Samaritan Health Service had identifiably lower average dietary costs, purchasing and material management costs, and personnel administration costs, i8 Centralized purchasing for two New Jersey hospitals resulted in first-year savings of $163,000 out of a $6 million volume.19 The Lutheran Hospital Society of Souther
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California saved $1,158,000 by avoiding certain duplicate services and facilities and another $1,820,000 through identifiable economies of scale, a saving of approximately 6% of annual operating costs. 2° Many other reports could be cited now that multihospital systems have begun to publish these types of savings. In order to verify that these economies can apply to smaller hospitals and to two- or three-unit systems, the authors visited the Passavant Memorial Hospital at Jacksonville, Illinois. This consolidation of two 150-bed hospitals resulted in a $300,000 saving (per year) out of the combined operating budgers of approximately $5 million. Another economic effect of the Northwestern Memorial Hospital consolidation has been the benefits of improved personnel administration. In private communications, we have been assured that the consolidation of operations was followed eventually by better overall institutional management. The benefits were not always immediately apparent because of the presence of tenured individuals, but a long-range benefit was argued strongly by our sources. Generally speaking, the quality of administration should be improved as the more effective manager assumes control of the consolidated department (or is hired from outside the organization). This will benefit personnel policies to the extent that there will be a better quality of staff, more effective staffing patterns, better training programs, and a reduced turnover. Performance standards with respect to quality and output can also be raised. O f course, there may be a corresponding increase in costs, as wages and fringe benefits are standardized (equalized) across the various institutions, but the Northwestern Memorial experience indicated that the cost-savings aspects that resulted from the lower turnover and the better training more than offset the additional costs due to higher wages and fringe benefits. In addition, it has been their experience that the cumulative effect of all these aspects of personnel administration has served to attract better qualified individuals to the hospital. Economies of scale may not be realized immediately upon consolidation. They can be obscured by general inflationary increases or by the increased costs of expanded and new services. The lag time in identifying economies of scale due to consolidation has been confirmed empirically, using a theoretical model of the influence of hospital merger on average costs. 14 Holding all other factors constant, average costs are expected to rise after an adjustment period. The length of the adjustment period is variable, depending upon how long it takes to implement acceptable revisions in the organizational structure and in the management procedures that will ultimately result in cost reductions. After the adjustment period, average costs are reduced below the average costs for a comparable group of hospitals. When the model was applied to eight multihospital systems that had consolidated after 1962, the postulated theory regarding the postmerger differences in average costs held in all but one case. 14 The study of the Samaritan Health Service (Arizona), which resulted from a more recent merge r, also provided confirmation of the model. TM Therefore, it cannot be expected that economies of scale due to a consolidation of services will manifest themselves immediately.
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The initial start-up costs and the related costs of coordination and control may result in higher average costs during the immediate postmerger period. Capital savings are also possible because the consolidated unit may have more resources available to it to proceed with capital development, related to improvements in quality, which none of the units could afford individually. Nevertheless, hospital consolidation can also alleviate the pressure for new construction by providing the means for a more efficient utilization of beds. An additional reason that shared or consolidated services may offer capital savings is that off-site construction may become possible for various support and ambulatory services. The potential advantages of off-site construction include the following21: 1. New construction can be located on less expensive land, at an optimal distance from each of the parent facilities. 2. Construction would be at a lower cost than would be true for facilities located within the hospital. 3. Freeing space within the hospital may (a) Improve functional relationships, or (b) Increase operating efficiency, or both. 4. Renovation of hospital space may be possible at a lower cost than if similar new facilities were constructed. 5. A better selection of location is permitted for potential employees, thus reducing recruitment and turnover costs. 6. Expansion may be undertaken without disruption of existing patient care operations of the hospital(s). 7. Off-site construction may foster better community relations for the hospital. There are numerous examples of hospital consolidations that demonstrate substantial savings of capital funds. The consolidation "of a children's hospital with a medical center in California enabled the medical center to avoid spending almost $4 million in capital funds, zz In Cincinnati, Ohio, three hospitals made 260 beds available by dropping their obstetric departments; 220 of these beds were later converted to use for medical-surgical patients, and $18 million in new-bed construction was avoided. 12 Two Denver area hospitals consolidated their pediatric and obstetric departments in order to bring cost savings and better patient care to their communities. One hospital agreed to take all obstetric cases, while the other assumed responsibility for all pediatric services. By closing down its pediatric beds, the first hospital was able to avoid the costs of a new 20-bed orthopedic unit--about $700,000. The other hospital converted its former obstetric facilities into an outpatient surgery center and a 24-bed adolescent unit/3
POTENTIAL DISADVANTAGES OF C O N S O L I D A T I O N
A major obstacle to consolidation lies in the social costs of overcoming the inertia of corporate structures that prefer to be independent. There is also a political risk involved when one disturbs the status quo--a risk that may be
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lessened as public attitudes change. Nevertheless, because rate-review and prospective reimbursement schemes will probably be increasingly employed by third-party payers within the next decade, it would behoove hospital trustees to experiment now--while they still have the freedom to do so. A second observation is that costs may increase after consolidation, raising the spectre of unrealized expectations. The Northwestern Memorial experience showed that, while unit costs for laboratory services were reduced, the availability of a wider variety of laboratory tests produced increased utilization of the more effective laboratory services and, therefore, increased total costs. It would appear then that the consolidation produced a higher quality of care (if one assumes that breadth and intensity of laboratory testing is synonymous with quality care) at some increase in total cost, despite the lowered unit cost. It has not generally been the experience of the hospital industry that larger hospitals reduce costs. Just the opposite has been true? However, this pattern of costs has developed during a period in which hospitals were reimbursed by third-party payers on the basis of "reasonable costs", an open-ended formula with a built-in incentive to spend. Large community hospitals, and university-based hospitals in particular, had no incentive to use their size in the most cost-effective manner. In fact, they had a disincentive, which led many of them to assume the leadership in providing every new service that was developed, regardless of cost. Many smaller community hospitals tended to imitate this process, a trend which has only recently been identified, much less reversed. It remains to be seen whether a tertiary care center will be permitted to continue to charge an obstetrical patient $200 per day when the same delivery and quality of care can be provided elsewhere for $100 per day. A very difficult factor that mitigates against cooperative efforts is the one of economic risk. If Hospital A, with an 80% medical-surgical occupancy, closes its emergency room in favor of Hospital B, Hospital A may find its occupancy rate reduced to 70%, while Hospital B's rate increases. The solution to this problem is not easy and must lie in the negotiation process. However, if the consolidation of emergency rooms results in cost savings and an improvement in quality of care, Hospitals A and B are morally obligated to resolve the problem. Otherwise, despite pious protestations to the contrary, they are condemning their patients to inferior care at higher cost. Finally, the consolidation of services cannot be done without some dislocation of personnel. Aside from the political disadvantage of requiring professionals to perform their services in unfamiliar surroundings, there can be a more serious problem--that of the expenses related to the travel or transportation for professionals, patients, and supplies. Before any consolidation steps are taken, the possibility of a significant increase in travel costs should be thoroughly examined. However, two studies of regional hospital operations indicate that travel costs, and the costs related to travel time, will not be materially affected by changes in location--up to six miles in an urban community and perhaps twice that distance outside the city. 24,25
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REFERENCES 1. American Hospital Association: Hospital Statistics: 1976 Edition. Chicago, American Hospital Association, 1976. 2. Harmons GJ: Start planning by defining the community, its future needs. Hospitals 50:105-112, 1976. 3. Turbyville C (exec ed): Editorial. The Blue Sheet, vol 20, no 1, p 3, 1977. 4. Havighurst CC, Blumstein JF: Coping with quality cost tradeoffs in medical care: The role ot PSROs. Northwestern University Law Review 70:6-68, 1975. 5. Haggerty RJ: The boundaries of health care. Pharos, July 1972, pp 106-111. 6. Carlson RJ: Alternative legislative strategies for licensure: Licensure and health. Presented at the Conference on Quality Assurance in Hospitals, Boston University, Program on Public Policy for Quality Health Care, November 21-22, 1975. 7. McNerney wJ: The quandary of quality assessment. N EnglJ Med 295:1505-1511, 1976. 8. Platt RD, Grossman JB: Utilization of facilities for heart surgery (correspondence). N EnglJ Med 284:1386-1387, 1971. 9. Likoff WA, Chairman, Heart Disease Advisory Committee: Optimal criteria for care of heart disease patients.JAMA 226:1340-1344, 1973. 10. Scannell JG, Brown GE, Buckley MJ, etal: Report of the inter-society commission for heart disease resources. Optimal resources for cardiac surgery. Guidelines for program planning and evaluation. Circulation 50: no 5, A-23-A-41, 1975. 11. Hiatt HH: Protecting the medical commons: Who is responsible? N EnglJ Med 293:235-241, 1975. 12. Ensminger B: The $8 Billion Hospital Bed Overrun. Washington, DC, Health Research Group, 1975. 13. Money WH, Gilfallen DP, Duncan R: A comparative study of multi-unit health care organizations. In Organizational Research in Hospitals. Chicago, Blue Cross Association, 1976. Pp 29-61. 14. Cooney JP, Alexander TL: Multihospital Systems: An Evaluation, Part One: Overview. Chicago, Health Services Research Center, 1975. 15. Curran WJ, Mosely GB III: The malpractice experience of health maintenance organizations, Northwestern University Law Review 70:69-89, 1975. 16. Cartel D: Malpractice issues in Illinois. An address to the Champaign County Medical Society, Nov. 11, 1976. 17. May J: Economic variables in hospital mergers. In DB Starkweather (ed): ,~nalysis of Hospital Mergers---Conference Proceedings, Rockville, Maryland, National Center for Health Services Research and Development, October, 1971. 18. Neumann BR: A financial analysis of a hospital merger: Samaritan health service. Med Care 12:983-998, 1974. 19. Owen JW: Wide-range sharing for two hospitals. Hospitals 48:105 1973. 20. Tibbits SJ: Multiple hospital systems. Hosp Admin Spring 1973, pp 10-20. 21. Cook HF: Shared services--complex but rewarding. Hospitals 47:87-87, 1973. 22. Levering RS: Links to medical center allow children's hospital to provide more services at lower cost. Mod Hosp, August 1973, pp. 57-60. 23. New ways to drive down hospital costs. U.S. News and World Report, February 18, 1974, pp 58-60. 24. Robinette TK: The small hospital and the areawide planning agency: A basis for constructive dialogue. Am J Public Health 62:1590-1595, 1972. 25. Presbyterian Hospital Center: Report of the Study of a Base-Satellite Hospital System. Albuquerque, Presbyterian Hospital Center, 1974.
