Testing for cost efficiency differences between two groups of rural hospitals

Abstract

Critical Access Hospitals (CAHs) receive cost-based reimbursement for services provided to Medicare patients, while the prospective payment system (PPS) pays non-CAH rural hospitals a fixed price per case. However, the two reimbursement models may provide different incentives for hospitals. The PPS may motivate hospitals to keep their unit costs below the reimbursement rates in order to make profits. Cost-based reimbursement, which pays CAHs for the total cost of services, may provide a disincentive for cost control. We statistically test the hypothesis that CAHs are less cost efficient than non-CAH rural hospitals. Recent methodological advancements as well as traditional approaches were used with 3 years of data jointly to assess cost efficiency differences between the two groups of rural hospitals. Data envelopment analysis (DEA) showed that, on average, CAHs were less cost efficient than non-CAH rural hospitals. Density analysis of DEA cost efficiency scores also showed that CAHs were less cost efficient than non-CAH rural hospitals. Marginal effects of environmental variables, estimated using bootstrapped truncated regression, tobit, and stochastic frontier analysis, suggested that CAHs were less cost efficient than non-CAH rural hospitals, although tobit showed statistical insignificance. Overall, the results of our analysis support the hypothesis that CAHs are less cost efficient than non-CAH rural hospitals.