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Date
Jun
06
2006

Hospital Financial Condition and Operational Decisions Related to Quality of Care

Presenter:

Gloria Bazzoli

Authors:

Gloria Bazzoli, Richard Lindrooth, Jan Clement, Hsueh-Fen Chen

Chair: Michael Hagan; Discussant: Michael Hagan Tue June 6, 2006 13:45-15:15 Room 213

Over the last decade, the US hospital industry has experienced intensifying financial pressures as labor and other costs grew rapidly relative to slower increases in hospital payments. In fact, the Medicare Prospective Payment Advisory Commission reported that nearly one-third of hospitals had negative total margins in 2003. These pressures have raised concern. Some institutions may close limiting access to care in some communities. However, closure may not be the biggest issue given existing research showing that hospitals frequently continue to operate despite dire financial circumstances. Instead, hospitals may be forestalling closure by reducing the quality of their services. Our research examines if this is the case, assessing the relationship between hospital financial condition and operational decisions related to quality of care.

Our theoretical model draws directly on economic theory of production. We model product quality as a derivative of the production process and hospital choice of inputs. A number of studies have examined the effect of financial pressures on hospital staffing decisions, but few have examined its effect on hospital processes and infrastructure supporting the care-giving process or on the upkeep of hospital facilities. We examine proxies for these latter dimensions, specifically hospital compliance with certain Joint Commission on the Accreditation of Healthcare Organization (JCAHO) performance areas and hospital investments in plant and equipment.

Although many JCAHO standards are not difficult to meet, a subset is viewed as being particularly challenging by the accreditation agency, with annual compliance rates as low as 50%. We focus on this subset, which includes such things as hospital procedures for ensuring medication or anesthesia safety. Our net hospital plant assets measure, on the other hand, relates to the quality of equipment and technology available for patient care. Low levels of net plant assets, for example, likely mean that antiquated facilities and technology are not being replaced.

For our empirical work, we examine a 6-year longitudinal database on 3,000 US general hospitals that were operational between 1995 and 2000. This database blends data from: the AHA Annual Survey; Medicare hospital cost reports; selected JCAHO performance areas; Area Resource File; and InterStudy. We estimate instrumental variables fixed and random effects models that control for unmeasured hospital and market characteristics. We use overidentification tests to assess the validity of our instruments, and Hausman specification tests to assess the adequacy of various models.

To date, our analysis has found that the quality of hospital infrastructure and management processes decline with reductions in cashflow and revenues per patient day. These negative effects are most apparent for our net plant assets measure and for selected JCAHO performance areas that relate to the infrastructure that supports initial patient assessment, ongoing staff competency assessment, standardization of patient data, and maintenance of infection control standards. Overall, our research is yielding new insights about the relationship between hospital financial condition and operational decisions related to patient care and outcomes, especially as they pertain to the quality of hospital infrastructure and processes to support patient care.

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The American Society of Health Economists (ASHEcon) is a professional organization dedicated to promoting excellence in health economics research in the United States. ASHEcon is an affiliate of the International Health Economics Association (iHEA). ASHEcon provides a forum for emerging ideas and empirical results of health economics research.