Is the System Really the Solution? Operating Costs in Hospital Systems

Hospital system formation has recently accelerated. Executives emphasize scale economies that lower operating costs, a claim unsupported in academic research. Do systems achieve lower costs than freestanding facilities, and, if so, which system types? We test hypotheses about the relationship of cost with membership in systems, larger systems, and centralized and local hub-and-spoke systems. We also test whether these relationships have changed over time. Examining 4,000 U.S. hospitals during 1998 to 2010, we find no evidence that system members exhibit lower costs. However, members of smaller systems are lower cost than larger systems, and hospitals in centralized systems are lower cost than everyone else. There is no evidence that the system’s spatial configuration is associated with cost, although national system hospitals exhibit higher costs. Finally, these results hold over time. We conclude that while systems in general may not be the solution to lower costs, some types of systems are.