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Hospital Value

By April 29, 2010Commentary

Yesterday we discussed a favorable publication on high-performance hospital systems.  Today we are back to the less pleasant task of examining hospital costs and value.  Extensive research has reported the variations in quality and cost of hospital services in different regions.  A new brief commissioned by the National Business Group on Health and compiled by actuarial firm Milliman, Inc. looks at high and low value cities in regard to hospital care.   (Milliman Report) The basic definition of value in this report was utilization and spending and high value specifically meant low per capita inpatient cost for both Medicare and commercial insurers and positive hospital margins.  The authors note that most researchers have found little correlation between high cost hospitals and better quality and some low cost hospitals seem to have excellent quality.

The study began by taking the 25 lowest and 25 highest regions from the Dartmouth Atlas, as measured by inpatient admission rates.  The authors were able to look at data both on Medicare and commercial insurer patients.  They examined a variety of factors to see what might be correlated with high value as they defined it.  They found few correlations and concluded that this was good, because it suggested that hospitals could be high value under a variety of circumstances.   Of the 16 cities that ended up being judged high value, there was little relationship to hospital market concentration; commercial payer concentration, wages paid, the ratio of primary care to specialty care or even the intensity of care.

While it appeared that hospitals in some cities compensated for low Medicare rates by raising commercial rates, it other locales hospitals were able to make money without resorting to that tactic.  There are hospitals that apply good cost management to be able to make money on Medicare and charge reasonable rates to private payers.  These hospitals manage to be profitable overall.  Policymakers need to find ways to push all hospitals into this category.  There might be several ways to do this and unintended consequences need to be contemplated before any action is taken.  All-payer pricing systems might be mandated, as in Maryland, which would be tied to only a small level above Medicare.  One theory about hospital pricing is that when they have market power, many of them just spend to whatever they can charge.  An all-payer system would limit a hospital’s ability to justify spending whatever it could on wages, equipment and facilities.  Another approach might be to limit hospital, especially not-for-profit hospital, spending in various cost categories, such as administrator wages, and building and equipment costs.  Whatever approach is taken, it would be a worthwhile goal to get all hospitals into the high value category and the savings would be tens of billions annually.

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