Hospital Reimbursement and Treatment Intensity
- Presenter:
Chair: Gloria Bazzoli; Discussant: Jack Zwanziger Tue June 6, 2006 15:30-17:00 Room 325
Recent research suggests that a ‘new medical arms race’ may be beginning among hospitals due to the shift to less selective contracting and payment methods that do not motivate efficiency and also the emergence of new competitors (e.g., physician-owned specialty hospitals and diagnostic centers). In the context of the shift, we examine the extent to which a hospital’s service offerings explain its financial performance and test whether the importance of service mix relative to payer mix has changed over time. In doing so, we quantify the amount of variation in hospital financial performance that is due to service mix, payer mix, operational decisions, market characteristics, and ownership/mission. First, we regress hospital operating margins and cash flow ratios from the Medicare Cost Reports on the share of hospital inpatients in the 100 most common DRGs and MDC categories, payer mix, and a variety of ownership, market, and staffing variables. Next we calculate the partial (and adjusted) R-squared for each variable category. We then use inter-quantile regressions to assess which characteristics define poor versus strong financial performance. Finally, we control for the endogeneity of service offerings to assess the causal effect of service offerings on financial performance. Our sample includes all nonfederal, general short-term hospitals in operation between 1995 and 2002 in 11 states. Our service and payer mix variables are developed from inpatient admissions data reported in the HCUP-SID data for these states. The measures are combined with operating margins and cash flow data from the Medicare cost reports; hospital characteristics from the AHA Annual Survey; and market characteristics from the Area Resource file. The analysis controlling for endogeneity of service mix is based on a subset of 16 MSAs. Specifically, we estimate multinomial logits in the first stage for each MSA and include the residual from the multinomial logit in the second stage. Based on an initial analysis of 1995 to 2000 data, the OLS results and the quantile analysis for high performers indicate that hospital service mix became much more important in determining hospital financial performance beginning in 1997. Payer mix, in contrast, declined from being the most important determinant in 1995 to the third most important determinant in 2000. Looking specifically at hospitals with poorer than median performance, however, unprofitable payer mix remained the most important factor. The presence of uncompensated care and low reimbursement for Medicaid patients put hospitals with large shares of these patients at a significant competitive disadvantage. Certainly, a major factor that defines a strong performer is making the correct decisions about adding services that yield improvements in profitability. Strong performers also have more internal resources and access to capital to facilitate service expansions. Overall, this has led to an unequal distribution of financial performance among hospitals. This divergence in performance is likely to increase over time as long as the DRG weights of the Medicare Prospective Payment System make some services more profitable than others and as long as exogenous restraints on entry exist and are binding.
