Rising Hospital Costs and Service Intensity

Abstract

The purpose of this study is to indicate how the change in a package of patient care services is related to changes in hospital costs. Based on the empirical results performed, one can argue that the inflation in hospital costs on both a per day and per treated case basis is in part explained by a set of patient care service intensity variables. Results of many studies of hospital cost behavior implicitly support the notion that changes in quality of services are related to changes in hospital costs. Although these studies did not explicitly consider variables for quality, the variables in these other studies embody factors for quality of hospital patient care services [6, 7, 9, 10, 12, 14,17, 20]. In this study, the purpose is to indicate explicitly how the change in a package of patient care services is related to changes in hospital costs. This study stems from observations made in several empirical studies funded by the Social Security Administration. The purpose of those studies was to examine the impact of a particular method for hospital cost containment called prospective reimbursement (PR), on the rise in costs of hospital care [ 1, 2, 5, 11, 15, 24]. One general conclusion of the studies was that the use of hospital services was related to actions taken by hospital decision makers, i.e., administrators, nurses and doctors, to contain the rise in hospital costs. Although the evidence varied, some observations justify the notion that costs and the use of certain quality enhancing patient care services are related. For example, Dowling et. all. [1 1] found that some indicators of ancillary service use were lower in the PR hospitals than in a set of control hospitals. Specifically, they found that the number of laboratory tests per case increased more slowly in PR hospitals than in control hospitals, while the number of X-ray films per case increased faster in the PR hospitals than in control Jeffrey E. Jarrett is a professor in the Department of Management Science at the University of Rhode Island. He has a Ph.D. from New York University and has published articles in several professional journals including Management Science, Decision Sciences, The Journal of Accounting Research, The Journal of Finance, The Accounting Review, The Journal of Business Finance and Accounting, and The Review of Economic and Business Research. Note: The author gratefully acknowledges the comments of Ernest Kurnow and several anonymous referees in earlier drafts of this manuscript. Thanks is also given to Sherry Allison-Cooke and Harvey Zimmerman for permitting the author to gather the appropriate data for the study.