Presenter:

Paul McNamara

Authors:

Paul McNamara

Chair: Dean Lillard; Discussant: James Marton Wed June 7, 2006 8:00-9:30 Room 121

The Critical Access Hospital (CAH) Program, which provides cost-based reimbursement to isolated small rural hospitals, as opposed to the prospective reimbursement formula used for most other hospitals, provides an example of how equity concerns are implemented in the context of US health policy. However, no economic analysis exists that measures the value of providing access to rural hospital services delivered in a specific location. This paper measures the value of locally provided rural health services in the specific example of the Critical Access Hospital (CAH) program. Understanding this value is necessary for the evaluation of current federal rural health policy.

This paper proposes the travel-cost hospital choice method as the means of developing an estimate for the location-specific benefits provided by a small rural hospital participating in the CAH program. The travel cost or time cost method of measuring the value of access to health services builds upon Acton’s seminal work (1975), and has been broadly applied in the analysis of health care demand, with a notable example being the work of Gertler and van der Gaag (1990). However, the method and its extension to the valuation of services has not been applied often to rural health services in higher income countries, with two exceptions being the work by Clarke (1998) and McNamara (1999).

As an illustration of the general approach and to obtain an estimate of the value of a CAH in Illinois, this paper presents an analysis of the locational demand for hospital services by patients with pneumonia using Illinois 2001 hospitalization data. Using a 40% random sample of the pneumonia cases in the first quarter of the year leads to 4618 hospitalization cases. The per trip estimates range from $14.93 to $17.41 in the case of a small CAH in Benton, Illinois to between $43.44 to $46.91 on average for all the pneumonia cases of rural Illinoisans examined. Assuming the generalizability of these CV estimates, we find that a rural hospital provides significant benefits to the community simply as a function of its location and the community’s relative distance to alternative sources of care. Average estimates of the value of a rural hospital in Illinois (assuming 1200 inpatient admissions) ranged from $17,916 for a rural hospital in Benton, Illinois to an average value of $56,292 annually based on the entire data set of 4816 pneumonia hospitalizations. These estimates of value are much smaller than net financial cost (to Medicare compared to the CAH’s previous Medicare revenues) of the CAH program’s cost-based reimbursement for participating hospitals, which anecdotally is costing between $250,000 to over $1,000,000 per participating hospital. It should be noted that these estimates do not include some other important sources of value associated with a rural hospital: outpatient visits are not considered; the value of life saved through the presence of a nearby emergency room is not considered; and, the option value that rural residents experience because of the presence of a hospital in their community or area is not considered.