Variations in Cost among Hospitals of Different Sizes

Abstract

Much money and effort today is going into the development of the nation's medical facilities; the Federal government, acting under the Hill-Burton program, is spending a great deal on the construction of general, short-term hospitals (i.e., for an average patient-stay of less than 30 days); and there is an increasing amount of planning for regional health care facilities. The most efficient size for a hospital should be carefully ascertained in order that the available funds be utilized in the best fashion. The question of optimal hospital size becomes especially important as the population becomes more concentrated in urban centers where larger and larger hospitals could be effectively utilized. The purpose of this paper is to explore two aspects of cost variation with respect to hospital size among general, short-term hospitals. Studies comparing the costs of hospitals of different sizes have generally incorporated at least one of two biases. One is a failure to recognize salary and wage differentials due to factors other than hospital size. Such differentials are very large in this nonunionized field. These cost differentials inflate the costs of urban hospitals relative to the costs of hospitals in non-urbanized areas. The other bias stems from the use of adult and pediatric days as a measure of the output of hospitals, without adjustment for auxiliary services, the use and availability of which vary greatly among hospitals of different sizes. The use of the simple patient days measure in cost comparisons tends to inflate the costs of larger hospitals, which generally offer more of the specialized and expensive auxiliary services, relative to the costs of smaller hospitals. Together these two sources of bias tend to exaggerate the differe ce between the costs of large urban hospitals and the costs of small, non-urban hospitals.