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 followed by the growth of managed care on hospitals' profitability and net worth. New Jersey emerged from a regulated prospective payment system in 1992. The transition to a freely competitive market structure had a negative impact on hospital profitability, net worth, patient length of stay, and other measures of capacity utilization. Similarly, the doubling of the HMO penetration rate in the state between 1995 and 1997 is shown to have negatively influenced hospital financial viability. Hospitals have responded in part by increasing usage of outpatient services. The use of discounted fee-for-service instead of per diem reimbursement for outpatient services provides an incentive for hospitals to favor outpatient over inpatient services. The effect of these changes is detailed, along with data showing that the larger discounts given by hospitals to managed care organizations, Medicare, and Medicaid played an important role in explaining the diminished profitability of hospitals.