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Standardizing the hospital’s case load for diagnostic mix and resource use : a comparison of the RNI… Hardwick, Jill Margaret 1982

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STANDARDIZING  THE HOSPITAL'S CASE LOAD FOR  DIAGNOSTIC  MIX AND RESOURCE USE: A COMPARISON OF THE RNI AND INFORMATION THEORY INDICES by J I L L MARGARET HARDWICK B.A., U n i v e r s i t y o f Sydney, 1972  A THESIS SUBMITTED  IN PARTIAL FULFILLMENT OF  THE REQUIREMENTS FOR THE DEGREE OF MASTER OF SCIENCE  in THE FACULTY OF GRADUATE STUDIES Department o f H e a l t h Care and Epidemiology  We accept t h i s t h e s i s as conforming to the r e q u i r e d  standard  THE UNIVERSITY OF BRITISH COLUMBIA March 1982  Q  J i l l Margaret Hardwick, 1982  In  presenting  this  requirements of  B r i t i s h  i t  freely  agree for  for  an  available  that  I  understood  that  f i n a n c i a l  by  his  or  at  the  The 2075  University Wesbrook  reference  and  study.  I  extensive be  her or  s h a l l  Vancouver, V6T  Date  DE-6  (2/79}  of  B r i t i s h  Place  Canada  1W5  A  P  r i l  2 4  '  1  9  8  2  University s h a l l  copying  granted  by  the  of  p u b l i c a t i o n  not  be  allowed  Columbia  of  make  further this  head  representatives.  HEALTH CARE AND EPIDEMIOLOGY  of  the  Library  permission.  Department  of  the  may  copying  gain  degree  fulfilment  that  for  purposes  or  p a r t i a l  agree  for  permission  scholarly  in  advanced  Columbia,  department  for  thesis  It  this  without  thesis  of  my  is thesis my  written  Abstract STANDARDIZING THE HOSPITAL'S CASE LOAD FOR DIAGNOSTIC MIX AND RESOURCE USE: A COMPARISON OF THE RNI AND INFORMATION THEORY INDICES J I L L MARGARET HARDWICK The  U n i v e r s i t y of B r i t i s h  Columbia  H o s p i t a l c o s t containment i s a p r i o r i t y f o r p r o v i n c i a l governments i n Canada and  reimbursing  a g e n c i e s i n the U n i t e d  States—a  consequence of  the dramatic r i s e i n the r a t e of h o s p i t a l c o s t i n c r e a s e s . shown t h a t t h i s i n c r e a s e  i s mainly due  to an i n c r e a s e i n r e s o u r c e  p a t i e n t day—more i n t e n s i v e l a b o u r ; more l a b o r a t o r y s o p h i s t i c a t e d technology. d i f f e r e n t cases,  The  Studies  l e v e l of resource  use  have use  t e s t s , drugs; more obviously varies for  depending on the n a t u r e of the p a t i e n t ' s i l l n e s s .  problems f a c i n g r e i m b u r s i n g  a g e n c i e s are t h a t o f r e d u c i n g  growth of h o s p i t a l e x p e n d i t u r e s and  per  The  the r a t e o f  an e q u i t a b l e reimbursement of h o s p i t a l s ,  t a k i n g adequate account of t h e i r d i v e r s e case  mix.  Simple measures of h o s p i t a l output such as the number of cases o r the number of p a t i e n t days assume an homogeneous output. various  As a consequence,  s t a n d a r d i z a t i o n techniques have been developed to s t a n d a r d i z e  case mix  variation,  proxies  f o r case mix  able i n a h o s p i t a l .  initially,  output s t a n d a r d i z a t i o n was  such as the number of s e r v i c e s and Later, diagnosis  itself  was  attempted  facilities  for using  avail-  used and weighted i n a  v a r i e t y of d i f f e r e n t ways. The  purpose of t h i s study i s to compare two  standardization—information  theory  and  the Resource Need Index.  approaches r e l y on d i f f e r e n t assumptions. critically ability  examine t h e i r c o n c e p t u a l  approaches to case  compare t h e i r  relative  to e x p l a i n i n t e r - h o s p i t a l c o s t d i f f e r e n c e s i n A l b e r t a . ii  These  Hence the i n t e n t i o n i s to  bases and  mix  The  e m p i r i c a l r e s u l t s show t h a t the  information  theory measure performs  b e t t e r than the Resource Need Index i n e x p l a i n i n g h o s p i t a l An built  illustrative  example i s g i v e n  to show how  costs.  t h i s technique can  i n t o the budget s e t t i n g p r o c e s s i n A l b e r t a to e f f e c t a more  equitable  d i s t r i b u t i o n of r e s o u r c e s among h o s p i t a l s .  Robert G. Evans, Ph.D. Thesis Supervisor  iii  be  Table o f Contents Page Chapter 1  Introduction. 1.1. 1.2. 1.3. 1.4. 1.5. 1.6.  Chapter 2  1  Reasons f o r H o s p i t a l Cost I n c r e a s e s i n Canada.. Government Concern Policy Initiatives. Methods o f Cost Containment Scope of t h i s T h e s i s Purpose o f t h i s Study  1 5 6 8 9 11  Reference Notes  12  H o s p i t a l Cost S t u d i e s : A C r i t i c a l Review o f the L i t e r a t u r e w i t h S p e c i a l A t t e n t i o n to Output Standardization  13  2.1. 2.2. 2.3. 2.4. 2.5.  T h e o r e t i c a l Assumptions The N e o c l a s s i c a l Cost Theory of the F i r m P e c u l i a r i t i e s o f the H o s p i t a l Industry "Economies o f S c a l e ' S t u d i e s Reimbursement S t u d i e s  14 15 19 25 36  2I5:i: 2.5.2. 2.5.3. 2.5.4.  37 38 39 40  2.6.  S t a n d a r d i z a t i o n o f Output i n Terms o f Case Mix.  42  2.6.1. 2.6.2. 2.6.3.  42 42  2.6.4. 2.6.5. 2.6.6. 2.6.7. 2.6.8. 2.6.9. 2.7.  Group T a r g e t C e i l i n g I n d u s t r i a l Engineering Departmental Budget Review P r o s p e c t i v e Reimbursement  S p e c i a l t y Mix Diagnostic Proportions D i a g n o s t i c P r o p o r t i o n s and A d d i t i o n a l Case Mix Measures I n f o r m a t i o n Theory Other A p p l i c a t i o n s o f the I n f o r m a t i o n Theory Measure i n Canada A p p l i c a t i o n o f the I n f o r m a t i o n Theory Measure i n t h e U.S D i a g n o s i s R e l a t e d Groups Resource Need Index Common Problems  44 45 47 51 53 59 63  Summary o f S t a n d a r d i z a t i o n o f Output i n Terms o f Case Mix  66  2.7.1. 2.7.2. 2.7.3. 2.7.4.  66 67 68 70  Diagnostic Factor Proportions I n f o r m a t i o n Theory D i a g n o s i s R e l a t e d Groups Resource Need Index.  Reference Notes.  iv  72  Page Chapter  3  Methodology f o r the Comparison o f Two Approaches t o Case Mix S t a n d a r d i z a t i o n : I n f o r m a t i o n Theory and the Resource Need Index.  75  3.1. 3.2.  Form o f the H o s p i t a l E q u a t i o n . Sources o f Data.  76 80  3.2.1.  Hospitals...  81  3.2.2.  Time P e r i o d  81  3.3.  3.4.  Chapter  4  Variables.  83  3.3.1.  Dependent V a r i a b l e s  83  3.3.2.  Independent V a r i a b l e s  85  Regression A n a l y s i s  Reference Notes  96  Appendix  98  Empirical Results 4.1. 4.2. 4.3.  Reference 5  103  An E v a l u a t i o n o f the RNI Compared t o I n f o r m a t i o n Theory Measures o f Case Mix 104 S i g n i f i c a n c e o f the R e g r e s s i o n C o e f f i c i e n t s . . . . . 112 S e l e c t i o n o f the " B e s t " E q u a t i o n 117 4.3.1. 4.3.2. 4.3.3.  Chapter  94  DAYEX o r CASEX? The e q u a t i o n o f "best f i t " A p p l i c a t i o n o f the e s t i m a t e d c o s t , . , e q u a t i o n to t h e budgeting p r o c e s s  Notes  118 119 124 133  Summary and C o n c l u s i o n  134  Reference  142  Notes  Bibliography  143  v  List  of T a b l e s Page  1.1.  H e a l t h E x p e n d i t u r e s i n Canada, 1970-1978  2  1.2.  H o s p i t a l E x p e n d i t u r e s i n Canada, 1970-1978  3  2.1.  "Economies of S c a l e  2.2.  Quebec Approach - L i s t and Source o f Output V a r i a b l e s  50  3.1.  H o s p i t a l and Bed D i s t r i b u t i o n , A l b e r t a , 1979  82  3.2.  E i g e n v a l u e o f Age-Sex F a c t o r Scores  90  3.3.  V a l u e s f o r Most o f the Independent V a r i a b l e s and the Two Dependent V a r i a b l e s (CASEX and DAYEX) Used i n the Regression Analysis  98  1  Studies:  Summary o f F i n d i n g s  22  4.1.  DAYEX E q u a t i o n s w i t h A l t e r n a t i v e Case Complexity  4.2.  CASEX E q u a t i o n s w i t h A l t e r n a t i v e Case Complexity V a r i a b l e s . . . 1071  4.3.  DAYEX E q u a t i o n s w i t h S i z e , U t i l i z a t i o n , Wage, I n d i r e c t Expense, Case Complexity and S p e c i a l i z a t i o n V a r i a b l e s  4.4.  4.5.  4.6.  4.7.  V a r i a b l e s . . . 105  CASEX Equations w i t h S i z e , U t i l i z a t i o n , Wage, I n d i r e c t Expense, Case Complexity and S p e c i a l i z a t i o n V a r i a b l e s . . . . . . . . DAYEX E q u a t i o n s w i t h I n f o r m a t i o n Theory and S p e c i a l i z a t i o n V a r i a b l e s  Case  CASEX E q u a t i o n s w i t h I n f o r m a t i o n Theory and S p e c i a l i z a t i o n V a r i a b l e s  Case  109  HI  Complexity 120 Complexity 123  A c t u a l and P r e d i c t e d Cost p e r Case i n 112 A l b e r t a H o s p i t a l s . . 126  vi  L i s t of Figures Page 2.1. 2.2. 2.3. 2.4.  The Short Run Cost S t r u c t u r e i n the N e o c l a s s i c a l Theory of the F i r m  17  The Long Run Cost S t r u c t u r e i n the N e o c l a s s i c a l Theory of the F i r m  18  Summary o f Lengths d f Stay D i s t r i b u t i o n f o r DRGs Formed i n p a r t i t i o n i n g process  55  Steps I n v o l v e d i n C o n v e r t i n g Average Charge Data t o a Resource Need Index  61  vii  Acknowl ed gemen t s  S p e c i a l thanks go to my  t h e s i s committee:  s u p e r v i s o r , Dr. M o r r i s B a r e r , Mr. T h e i r combination  Dr. Robert Evans, t h e s i s  F r a n c i s B r u n e l l e , Dr. Anne C r i c h t o n .  of t a l e n t s and t h e i r support have been e s s e n t i a l i n the  development and c o m p l e t i o n of the Robert Evans h e l p e d me  thesis.  develop  the c o n c e p t u a l framework o f the study  and m e t i c u l o u s l y c r i t i q u e d every a s p e c t o f the work as i t proceeded.  His  p e r s p e c t i v e and u n d e r s t a n d i n g of the s u b j e c t made working w i t h him a valuable l e a r n i n g experience. M o r r i s B a r e r p r o v i d e d e s s e n t i a l t e c h n i c a l e x p e r t i s e and v e r y u s e f u l critical  comments on an e a r l i e r d r a f t .  He p r o v i d e d a c c e s s to computer  programs, a l l o w i n g the e m p i r i c a l s e c t i o n s o f the t h e s i s to proceed much more r a p i d l y than would have been o t h e r w i s e p o s s i b l e . F r a n B r u n e l l e , as D i r e c t o r o f I n s t i t u t i o n a l O p e r a t i o n s , A l b e r t a H o s p i t a l s and M e d i c a l Care, and p r e c e p t o r f o r my i n s t i g a t e d the study.  summer c l e r k s h i p i n  H i s support and enthusiasm  funds f o r the purchase o f n e c e s s a r y data and my  1979,  f o r the p r o j e c t  ensured  summer employment.  His  i n t e r e s t enabled a c c e s s to a l l r e l e v a n t data w i t h i n the Department o f H o s p i t a l s and M e d i c a l Care, and h i s c r i t i c a l  comments a l o n g the way  were  most u s e f u l . I am deeply i n d e b t e d to Anne C r i c h t o n f o r her u n f a i l i n g throughout my program.  graduate  s t u d i e s i n c l u d i n g my  support  i n i t i a l acceptance  to the  Her i n t e l l e c t u a l i n s i g h t and t e a c h i n g s k i l l s have aroused  i n t e r e s t and i n c r e a s e d my  my  knowledge i n numerous areas o f h e a l t h p o l i c y  and p l a n n i n g .  viii  Other p e o p l e i n A l b e r t a H o s p i t a l s and M e d i c a l for  t h e i r support and/or i n t e r e s t and  J e f f Babb, L a r r y Charach, Mo  assistance:  Cheung, Don  Graydon.  S h e r i Game f o r p r o v i d i n g computer e x p e r t i s e and requests.  L i s a H o l t o r f , C e l i n e Hanlon and  Ann  Care deserve mention Ted Wright, Ken  S p e c i a l thanks go  fulfilling M c C a l l were  a l l my  a c o n g e n i a l work environment, as w e l l as p r o v i d i n g c l e r i c a l  and  typing.  for  classmates i n the H e a l t h  Services Planning  to  data  responsible  for  To my  Moore,  assistance  Program I am  thankful  a s t i m u l a t i n g l e a r n i n g environment and many deep f r i e n d s h i p s . My  f a m i l y , d e s p i t e t h e i r p h y s i c a l d i s t a n c e , o f f e r e d encouragement  through r e g u l a r correspondence.  Evan Jones not o n l y p r o v i d e d  support but a l s o o f f e r e d a s t u t e comments and G a i l Kuhry and final  constructive  L i z Stephenson d i d a f i r s t  draft.  ix  continuing  criticism.  c l a s s job t y p i n g  the  1  Chapter  1.  Introduction  The r a p i d growth i n h e a l t h e x p e n d i t u r e s i n Canada and  inter-  n a t i o n a l l y has been a source o f major concern i n the l a s t decade. has prompted numerous s t u d i e s on the magnitude and h e a l t h b i l l and  the reasons  T a b l e 1.1 decade.  composition of  the  f o r the dramatic c o s t i n c r e a s e s .  shows t o t a l h e a l t h e x p e n d i t u r e s i n Canada d u r i n g the  They have i n c r e a s e d from 6,086.6 m i l l i o n d o l l a r s i n 1970  16,181.5 m i l l i o n d o l l a r s i n 1978 of 13.1  This  percent.  w i t h an average  last  to  annual r a t e o f i n c r e a s e  T h i s r i s e i s s i g n i f i c a n t l y g r e a t e r than the r a t e of  i n c r e a s e of the Consumer P r i c e Index (CPI), which has an average growth over the same p e r i o d o f 7.7  r a t e of  percent.  A s i g n i f i c a n t p r o p o r t i o n of t o t a l h e a l t h e x p e n d i t u r e s a r e h o s p i t a l expenditures.  W i t h i n t h i s c a t e g o r y , g e n e r a l and a l l i e d s p e c i a l h o s p i t a l s  take the l a r g e s t share. and  The l a t t e r are the acute s h o r t term  t h e i r expenditure i s approximately  budget.  T a b l e 1.2  m i l l i o n i n 1970 i n c r e a s e was  shows t h a t t h e i r e x p e n d i t u r e s r o s e from $2251.7 The average  annual r a t e o f  p e r c e n t , even h i g h e r than the r a t e o f i n c r e a s e f o r  t o t a l h e a l t h expenditures 1.1  40 p e r c e n t o f the t o t a l h e a l t h  to $6642.1 m i l l i o n i n 1978.  14.7  hospitals  (13.1%) over the same p e r i o d .  Reasons f o r H o s p i t a l Cost I n c r e a s e s i n Canada What a r e the reasons  f o r t h i s rapid increase i n h o s p i t a l costs?  The answer to t h i s q u e s t i o n i s complex and  i s r e l a t e d to p o p u l a t i o n  growth, u t i l i z a t i o n p a t t e r n s , p r i c e changes and changes i n the i o n of the h o s p i t a l  workforce."''  composit-  Table 1.1.  1970  T o t a l h e a l t h expenditures  ($m)  6,086.7  Rate o f i n c r e a s e  Rate of i n c r e a s e o f CPI  D o l l a r s per c a p i t a  P e r c e n t of GNP  Source:  H e a l t h Expenditures  1971  6,935.8  1972  7,542.9  i n Canada, 1970-1978  1973  8,429.6  1974  1975  1976  1977  1978  9,906.0 11,888.0 13,551.2 14,702.7 16,181.5  14.0  8.8  11.8  17.5  20.0  14.0  8.5  10.1  2.9  4.8  7.5  10.9  10.8  7.5  8.0  9.0  285.44  •321.22  345.66  381.91  442.32  523.08  588.54  631.55  688.77  7.10  7.34  7.17  6.82  6.71  7.19  7.09  7.04  7.04  N a t i o n a l Health E x p e n d i t u r e s i n Canada, 1970-1978, H e a l t h Information D i v i s i o n I n f o r m a t i o n Systems D i r e c t o r a t e , P o l i c y , P l a n n i n g and I n f o r m a t i o n Branch, Department of N a t i o n a l H e a l t h and Welfare, August 1980.  Table 1.2  Total hospital  expenditures  H o s p i t a l Expenditures in.Canada,  1970-1978  1970  1971  1972  1973  1974  1975  1976  1977  1978  2758.6  3078.5  3365.2  3783.2  4588.4  5679.0  6434.6  6768.5  7337.7  2251.7  2529.8  2785.7  3150.2  3877.7  4873.7  5673.0  6046.1  6642.1  37.0  36.5  36.9  37.4  39.1  41.0  41.9  41.1  12.4  10.1  13.1  23.1  25.7  16.4  6.6  9.9  2.9  4.8  7.5  10.9  10.8  7.5  8.0  9.0  105.60  117.16  127.66  142.72  173.15  214.45  246.38  259.71  282.72  2.63  2.68  2.65  2.55  2.63  2.95  2.97  2.90  2.89  52.23  58.47  64.64  71.35  84.94  105.95  120.56  126.41  130.38  11.9  10.6  10.4  19.0  24.7  13.8  4.9  3.1  12.3  12.3  12.3  12.0  11.9  11.7  11.5  11.7  10.8  11.0  11.0  10.8  10.8  10.7  10.5  10.7  G e n e r a l and a l l i e d special hospitalsl Total  expenditure  P e r c e n t o f t o t a l h e a l t h exp Rate o f i n c r e a s e o f t o t a l general & a l l i e d s p e c i a l h o s p i t a l expenditure Rate o f i n c r e a s e o f CPI D o l l a r s per c a p i t a P e r c e n t o f GNP Average c o s t p e r p a t i e n t day Rate o f i n c r e a s e  2  P a t i e n t days p e r 100,000 pop. (M) (F)  4i.o  """Statistics Canada c l a s s i f i e s h o s p i t a l s i n t o three d i f f e r e n t c a t e g o r i e s : G e n e r a l ^ A l l i e d S p e c i a l , M e n t a l . General h o s p i t a l s p r o v i d e f o r the d i a g n o s i s , treatment and care o f a l l types o f d i s e a s e s to people o f a l l age and sex groups. A l l i e d S p e c i a l h o s p i t a l s i n c l u d e p e d i a t r i c , m a t e r n i t y , r e h a b i l i t a t i o n , extended c a r e and o t h e r h o s p i t a l s . 2 Mean c o s t p e r p a t i e n t day ( e x c l u d i n g e d u c a t i o n a l programs and s p e c i a l r e s e a r c h ) f o r t o t a l p u b l i c ( e x c l u d i n g p r o p r i e t a r y and f e d e r a l ) h o s p i t a l s . Sources: (1) Canada. Department o f N a t i o n a l H e a l t h and Welfare. N a t i o n a l H e a l t h E x p e n d i t u r e i n Canada,1970-78. (2) Canada. S t a t i s t i c s Canada. H o s p i t a l i n d i c a t o r s , 1970-77. Catalogue 83-001. (3) Canada. S t a t i s t i c s Canada. H o s p i t a l M o r b i d i t y , 1970-77. Catalogue 82-206. CO  4  Evans (1975) and increases  Soderstrom (1978) examine the r e c e n t  i n Canada, a s c r i b i n g t h e s e i n c r e a s e s  F i r s t , t h e r e has  main  sources.  been i n c r e a s e d u t i l i z a t i o n of h o s p i t a l s e r v i c e s , measured  i n terms of p o p u l a t i o n admission.  to two  h o s p i t a l cost  growth, admission r a t e s and  Second, t h e r e has  been an  increased  p a t i e n t days per  c o s t per p a t i e n t  the a c t u a l c o s t of the s e r v i c e s r e c e i v e d by the p a t i e n t has each day  h i g h r a t e of i n c r e a s e of o n l y 2.1  p a t i e n t day  by  percent  increases 9.3  i s not  i n hospital costs.  and  the major source of  Evans (1975) r e p o r t s an  i n population  u t i l i z a t i o n between 1953  h o s p i t a l cost increased  and  1.4  1971.  percent  for  annually  f o r the  same time p e r i o d .  f o r the p e r i o d  1970-1978.  C o s t s per p a t i e n t day  have i n c r e a s e d  f o r a v a r i e t y of  Most s i g n i f i c a n t of these reasons i s the i n c r e a s e T h i s i s p a r t l y due  to g e n e r a l  to a " c a t c h i n g up"  increase  increase  i s the r i s e i n c o s t per p a t i e n t day.  percent  this  The major source of  shows c o s t per p a t i e n t day  due  increased  of h i s (her) h o s p i t a l s t a y .  Their data r e v e a l that u t i l i z a t i o n  annually  day—  Table  had  the figure 1.2  reasons.  i n wages and  i n f l a t i o n i n the economy; but  of h o s p i t a l employees who  This  in  salaries.  i t i s also  experienced  r e l a t i v e l y lower wages than o t h e r s e c t o r s o f the economy—a hangover from the p e r i o d when h o s p i t a l s were c h a r i t a b l e i n s t i t u t i o n s . the c o m p o s i t i o n of the h o s p i t a l workforce has s p e c i a l i z e d and,therefore,  changed.  more q u a l i f i e d p e r s o n n e l who  In a d d i t i o n , I t comprises more attract  higher  salaries. Increased  c o s t s per p a t i e n t day  are a l s o a f u n c t i o n of  resource  use  per p a t i e n t day.  resource  use  i n terms of m e d i c a l s u p p l i e s and  input f o r the p e r i o d  1953-1971.  Evans (1975) showed an  There i s no  increased  increase  drugs as w e l l as reason to suspect  in real labour that  this  5  p a t t e r n has  changed.  If anything,real  resource  use may  have  increased  f u r t h e r w i t h the advent o f i n c r e a s i n g l y s p e c i a l i z e d m e d i c a l t e c h n o l o g y . The  framework of c o n v e n t i o n a l  i n c r e a s e s may or b o t h .  be due  Those who  economic theory  implies that  cost  to changing f o r c e s of demand, changing f o r c e s o f c l a i m t h a t h o s p i t a l c o s t i n c r e a s e s are due  supply,  to demand  f o r c e s argue t h i s p o s i t i o n i n terms of i n c r e a s e d u t i l i z a t i o n .  They argue  t h a t an i n c r e a s e i n a d m i s s i o n s per c a p i t a f o r c e s up  evidence c i t e d  e a r l i e r , however, shows t h a t t h e r e have been no admissions per c a p i t a i n Canada. further.  i n e l a s t i c though, t h e r e should T h i s has  not  occurred.  The  substantial increases  i n demand push up o v e r a l l  to an i n e l a s t i c supply.  I f supply  Finally,  they b e l i e v e t h a t there has been an case or per day.  the s e r v i c e s , who  the c a s e .  determine the n a t u r e and  the f a c t o r s d e t e r m i n i n g the c h a r a c t e r cost increases  I t i s the d o c t o r s ,  - i t i s the d o c t o r s who  determine r e s o u r c e  1.2.  use  f o r c e and  of  Thus i t i s  t h a t are r e s p o n s i b l e  h o s p i t a l s , w i t h t h e i r i n c r e a s i n g l y expensive l a b o u r who  are  o r the p r o v i d e r s  amount o f s e r v i c e s .  of supply  increas-  T h i s assumes,  however, t h a t p a t i e n t s a c t u a l l y demand s p e c i f i c s e r v i c e s when they T h i s i s not  were  be a c o r r e s p o n d i n g r i s e i n occupancy r a t e s .  ed demand f o r i n t e n s i t y , i . e . more s e r v i c e s per  hospitalized.  in  Demand s i d e economists take t h i s argument  They c l a i m t h a t even s m a l l i n c r e a s e s  c o s t s through p r i c e i n c r e a s e s due  costs.  and  for  the  the  technology,  i n f l u e n c e the l e v e l of h o s p i t a l e x p e n d i t u r e . Government Concern Government concern f o r the r a t e of i n c r e a s e  f i r s t developed i n the l a t e s i x t i e s .  B e f o r e t h i s time, the major p o l i c y  concerns o f the government were those of e n s u r i n g c a r e and  establishing uniformity  i n h o s p i t a l c o s t s i n Canada  i n the  f i n a n c i a l a c c e s s to  'quality' of c a r e —  a logical  to the i n t r o d u c t i o n of n a t i o n a l h o s p i t a l and m e d i c a l i n s u r a n c e . p r i o r i t i e s i n e v i t a b l y l e d to i n c r e a s e d ,  r a t h e r than decreased  health sequel  These expenditures.  6  The  p e r i o d a l s o c o i n c i d e d w i t h s u b s t a n t i a l h o s p i t a l expansion through  National Health vided  Grant Program (1948-1972).  T h i s program approved and  f i n a n c i a l a s s i s t a n c e f o r more than 130,000 beds.  a l s o given f o r nurses'  and  interns' residences,  and  treatment a r e a s f o r i n p a t i e n t s and  and  teaching  facilities  ated necessary recurrent expenditures By  the l a t e s i x t i e s i t was  would c o n t i n u e  14).  laboratories, diagnostic centres  T h i s c a p i t a l expansion gener-  which f u e l l e d the r a p i d l y r i s i n g  becoming apparent t h a t h e a l t h care  to consume: a l a r g e r p r o p o r t i o n of GNP  e f f o r t to c o n t a i n c o s t s .  Task Forces  unless  on the Cost o f H e a l t h  t h e r e was  some  Services i n  u t i l i z a t i o n , o p e r a t i o n a l e f f i c i e n c y , s a l a r i e s and wages, beds and methods o f d e l i v e r i n g m e d i c a l c a r e , the p r i c e of m e d i c a l c a r e , The  costs.  costs  Canada (1970) were e s t a b l i s h e d to examine f a c t o r s r e l a t e d to h e a l t h  public health services.  pro-  F e d e r a l g r a n t s were  o u t p a t i e n t s , community h e a l t h  (Le C l a i r , 1975,  the  costs—  facilities,  the c o s t of  Task F o r c e s produced a l o n g s e r i e s of recomm2  e n d a t i o n s i n a l l these areas . Report, 1972)  was  The  Community H e a l t h  a l s o e s t a b l i s h e d i n 1971  the i n c r e a s e i n h e a l t h s e r v i c e s c o s t s .  Centre P r o j e c t  because of c o n t i n u i n g concern over  T h i s r e p o r t recommended the  ment "of a s i g n i f i c a n t number of community h e a l t h c e n t r e s  had  were seen by 1.3.  develop-  ... as n o n - p r o f i t  c o r p o r a t e b o d i e s i n a f u l l y i n t e g r a t e d h e a l t h s e r v i c e s system". endation  (Hastings  T h i s recomm-  d e l i b e r a t e c o s t i m p l i c a t i o n s because community h e a l t h  centres  some as a cheaper a l t e r n a t i v e to some forms o f h o s p i t a l c a r e .  Policy Initiatives The  r a p i d i n c r e a s e i n c o s t s p r e c i p i t a t e d a v a r i e t y of p o l i c y i n i t i a t i v e s .  They i n c l u d e d a p o l i c y to share f a c i l i t i e s which would i n c r e a s e and m i n i m i z e d u p l i c a t i o n of s e r v i c e s .  The  r e s u l t was  efficiency  central laundries,  purchasing  and planned d i s t r i b u t i o n of s p e c i a l i z e d c l i n i c a l and  services.  R e g i o n a l i s a t i o n of p l a n n i n g  bulk  laboratory  and management o f s e r v i c e s was  also  7  introduced  t o reduce c o m p e t i t i o n  and prevent  duplication.  The e f f e c t i v e n e s s  of t h i s p o l i c y , however, was reduced by the r e l u c t a n c e o f the c e n t r a l a u t h o r ities  to r e l i n q u i s h c o n t r o l .  The D i s t r i c t H e a l t h C o u n c i l s  are an example o f a f a i l e d attempt a t d e c e n t r a l i z a t i o n . by Mustard  (DHCs) i n O n t a r i o  DHCs were proposed  (1974) to p l a n and manage h e a l t h s e r v i c e s a t a d i s t r i c t l e v e l i n  an attempt to i n c r e a s e community p a r t i c i p a t i o n and b r i n g about c o s t  restraint.  However, the r e l u c t a n c e o f the p r o v i n c i a l government to a u t h o r i z e budgetary a u t h o r i t y to the DHCs reduced the DHCs power, r e n d e r i n g  them i n c a p a b l e o f  a l t e r i n g the system and a c h i e v i n g t h e i r o b j e c t i v e s . G l o b a l b u d g e t i n g was another p o l i c y i n t r o d u c e d and  i n e f f i c i e n c y i n the h o s p i t a l system.  ated on a " l i n e - b y - l i n e " b a s i s .  to overcome  inflexibility  P r i o r to t h i s , budgets were a l l o c -  L i n e - b y - l i n e budgeting r e q u i r e s d e t a i l e d  e s t i m a t i o n o f a l l s a l a r i e s and s u p p l i e s f o r each h o s p i t a l a c t i v i t y .  Expen-  d i t u r e must then keep w i t h i n the a l l o c a t i o n f o r each a c t i v i t y and cannot be t r a n s f e r r e d between a c t i v i t i e s .  G l o b a l b u d g e t i n g was i n t r o d u c e d t o a l l o w  a d m i n i s t r a t o r s more d i s c r e t i o n over t h e i r r e s o u r c e s accountable One  and to make them  for their decisions.  proven way o f r e s t r a i n i n g c o s t s was to reduce the s u p p l y o f beds.  T h i s has been used e f f e c t i v e l y i n most p r o v i n c e s b u t i t has obvious ions.  F o r p o l i t i c a l reasons,  i t i s e a s i e r to slow down the r a t e o f expansion  than i t i s t o a c t u a l l y c l o s e beds. supply  i n provinces  limitat-  Thus i t i s e a s i e r to reduce the bed  l i k e B r i t i s h Columbia, where the p o p u l a t i o n i s growing  r a p i d l y , than i t i s i n p r o v i n c e s w i t h a s t a b l e o r d e c r e a s i n g Moreover, bed r e d u c t i o n  population.  i s a crude approach.. I t i s based on the n o t i o n o f  a predetermined number o f beds p e r thousand p o p u l a t i o n which a r e supposed to reflect  the "need" o f t h e p o p u l a t i o n .  As t h e r e i s no d e f i n e d c r i t e r i a to  e s t a b l i s h "need", these numbers a r e u s u a l l y a r b i t r a r y . method has been e f f e c t i v e to a c e r t a i n e x t e n t  Nevertheless,  i n containing costs.  this  8  D e s p i t e r e c o g n i t i o n o f the problem o f i n c r e a s i n g h o s p i t a l c o s t s , was  little  i n c e n t i v e f o r the p r o v i n c i a l governments  f e d e r a l - p r o v i n c i a l c o s t s h a r i n g agreement u r e s were shared on an e q u a l b a s i s .  to reduce c o s t s .  there The  d i s c o u r a g e d t h i s because e x p e n d i t -  I f the p r o v i n c i a l governments  t r i e d to  c o n t a i n c o s t s by r e d u c i n g beds o r p r o v i d i n g cheaper a l t e r n a t i v e s to h o s p i t a l i n p a t i e n t c a r e , they would end up l o s i n g funds from the f e d e r a l government under t h i s reimbursement ment changed.  system.  Only as r e c e n t l y as 1977 was  the a r r a n g e -  At t h i s time, the f e d e r a l government no l o n g e r guaranteed  the p r o v i s i o n o f f i f t y p e r c e n t o f h o s p i t a l e x p e n d i t u r e s .  I t d e c i d e d on a  base l e v e l f o r each p r o v i n c e w i t h an a n n u a l i n c r e a s e e q u a l to the change i n the CPI.  As c o s t s a r e r i s i n g f a s t e r than changes i n the CPI, the p r o v i n c i a l  governments  have to take g r e a t e r f i n a n c i a l r e s p o n s i b i l i t y f o r h o s p i t a l  expenditures.  The onus i s i n c r e a s i n g l y on them to i n t r o d u c e r e s t r a i n t i n  the system. 1.4. Methods o f Cost  Containment  A c o s t containment s t r a t e g y must proceed on a number o f l e v e l s - hospitr-:. a l , regional, provincial.  Some approaches to improved e f f i c i e n c y a t the  h o s p i t a l and r e g i o n a l l e v e l have been d i s c u s s e d .  These i n c l u d e p o l i c i e s o f  r e g i o n a l i s a t i o n o f s e r v i c e s and r e g i o n a l i s a t i o n o f the p l a n n i n g and admini s t r a t i o n of s e r v i c e s ; g l o b a l budgeting. i o n r e v i e w and peer r e v i e w — p r o g r a m s  Other approaches i n c l u d e  utilizat-  aimed to f o r c e d o c t o r s to be a c c o u n t a b l e  to each o t h e r and to the system g e n e r a l l y ; departmental b u d g e t i n g which attempts t o c r e a t e c o s t awareness  a t a department l e v e l and to d e l e g a t e some  o f the f i s c a l r e s p o n s i b i l i t y from the c h i e f a d m i n i s t r a t o r to a number o f department heads; i n d u s t r i a l e n g i n e e r i n g experiments which a r e e s s e n t i a l l y time and motion s t u d i e s aimed a t improving o p e r a t i o n a l  efficiency.  Cost containment a t the p r o v i n c i a l l e v e l can be a c h i e v e d by ' improving the c u r r e n t methods o f reimbursement  to h o s p i t a l s , r e d u c i n g the  9  t o t a l bed  supply,  s u b s t i t u t i n g some forms o f h o s p i t a l c a r e f o r cheaper a l t e r -  n a t i v e s , and/or changing the method o f payment of p h y s i c i a n s s e r v i c e to a s a l a r i e d o r s e s s i o n a l payment. been t r i e d , o t h e r s  are c o n s i d e r e d  1.5.  Thesis  Scope of t h i s The  Some of these p o l i c i e s have  too d i f f i c u l t  politically.  focus o f t h i s t h e s i s i s not an e v a l u a t i o n o f these v a r i o u s  es to c o s t containment.  I t i s not  Rather, some l i m i t s have to be study ,A t h e r e f o r e , —at  from f e e - f o r -  focusses  t h a t these programs are  imposed on  on one  the p r o v i n c i a l , l e v e l .  approach-  unimportant.  the scope o f t h i s t h e s i s .  of these s t r a t e g i e s to c o n t a i n  The  costs  I t examines ways o f improving the c u r r e n t  re-  imbursement system to a l l o w informed d e c i s i o n s to be made about where c o s t savings  can be made.  More s p e c i f i c a l l y , i t examines ways o f  f o r the heterogeneous n a t u r e o f the h o s p i t a l p r o d u c t and o f reimbursement t h a t takes case mix  standardizing  suggests a method  v a r i a t i o n across h o s p i t a l s i n t o  consideration. Most commonly, output i s measured i n terms o f t o t a l number of cases or p a t i e n t days but  t h i s measure assumes homogeneity a c r o s s h o s p i t a l s both  i n terms of the combination o f h o s p i t a l a c t i v i t i e s and treated.  A l l o c a t i o n o f budgets on  costs vary teaching, Berki  according e t c . ) and  (1972, 34)  to the mix according  of a c t i v i t i e s  (inpatient, outpatient,  to the types o f p a t i e n t s and  by d e s c r i b i n g t h r e e d i s t i n c t and  tests, administration);  care, hotel-type  surgical operations).  p a t i e n t days.  o f p a t i e n t s and  p a t i e n t days  d i f f e r e n t types of s e r v i c e s r e c e i v e d  p a t i e n t s a t d i f f e r e n t p o i n t s i n h i s (her) s t a y :  nursing  patients  t h i s b a s i s i s i n e q u i t a b l e because h o s p i t a l  i l l u s t r a t e s the h e t e r o g e n e i t y  (chest x - r a y , b l o o d  the types of  services); ( i i i )  by  (i) admission-specific  ( i i ) s t a y - s p e c i f i c (routine  diagnosis-specific (laboratory,  Thus h o s p i t a l output must be  standardized  to account  10  f o r the a c t i v i t y mix a r y purposes  and  case mix  i s to be meaningful  i f the comparison o f h o s p i t a l s f o r budgetand i f funds a r e to be e q u i t a b l y d i s t r i b u t e d .  P r e s e n t methods of b u d g e t i n g  i n Canada do not take case mix  variation  3 i n t o account.  Budgets are developed  the major h o s p i t a l a c t i v i t i e s .  on a l i n e - b y - l i n e b a s i s  E s t i m a t e s of c o s t s f o r p e r s o n n e l , equipment  and s u p p l i e s a r e c a l c u l a t e d f o r each d e p a r t m e n t — m e d i c a l , pathology,  etc.  These e s t i m a t e s a r e then submitted  ment f o r a p p r o v a l .  to the p r o v i n c i a l  f o r the case mix  i n l a s t year's c o s t s .  services.  There i s no  of the h o s p i t a l except what i s i m p l i c i t  complexity.  Thus, t h e r e i s no way  The f o c u s i s on h o s p i t a l  of comparing the performance o f  one h o s p i t a l w i t h another and budget a l l o c a t i o n i s an a r b i t r a r y , ad p r o c e s s based  on i n c r e m e n t a l i s m and r u l e s of thumb (Evans, 1975,  There i s growing r e c o g n i t i o n o f t h i s problem and response  the budget review p r o c e s s .  hoc  152-3).  t h i s study began i n  to a r e q u e s t by the government of A l b e r t a which was  on ways o f improving  based  H o s p i t a l e x p e n d i t u r e i s not s y s t e m a t i c a l l y l i n k e d to  output, s t a n d a r d i z e d f o r case mix i n p u t s , not o u t p u t s .  govern-  The main c r i t e r i o n f o r s e t t i n g budgets i s l a s t  y e a r ' s c o s t s w i t h a f a c t o r added f o r i n f l a t i o n and new to account  nursing, radiology,  Some n e g o t i a t i o n ensures, but t h i s i s not u s u a l l y  on w e l l d e f i n e d c r i t e r i a .  attempt  f o r each of  seeking  The government had  guidance exper-  i e n c e d c o n t i n u i n g d i f f i c u l t y i n i t s b a r g a i n i n g w i t h h o s p i t a l s over p r o s p e c t i v e budgets,  p o s s e s s i n g no d a t a on the r e l a t i v e performance o f h o s p i t a l s .  The government needed a measure of h o s p i t a l output t h a t r e f l e c t e d the c o s t of t r e a t i n g d i f f e r e n t types of p a t i e n t s . ment t h a t takes account  A s y s t e m a t i c approach to  reimburse-  of case mix d i f f e r e n c e s , not o n l y a l l o w s f o r b e t t e r  n e g o t i a t i o n s w i t h h o s p i t a l s , but a l s o has i m p l i c a t i o n s f o r r e d u c i n g the r a t e of cost increases.  11  1.6.  Purpose of t h i s The  Study  purpose of t h i s study i s to compare two  s t a n d a r d i z i n g h o s p i t a l output f o r use method i s the i n f o r m a t i o n (1972) i n O n t a r i o . by  The  theory  other  a l t e r n a t i v e methods of  i n the budget s e t t i n g p r o c e s s .  approach f i r s t used by Evans and  One  Walker  approach i s the Resource Need Index, developed  the Commission on P r o f e s s i o n a l and  Hospital A c t i v i t i e s .  d i f f e r e n t i a t e p a t i e n t s o r p a t i e n t days on  Both methods  the b a s i s of d i s c h a r g e  diagnosis.  However, they d i f f e r i n the way  they c l a s s i f y and  diagnosis  d e t a i l s on b o t h of these approaches w i l l  provided  information.  Further  i n the f o l l o w i n g  day  this  merit  o f the two  methods and  to which they e x p l a i n d i f f e r e n c e s i n c o s t per case o r c o s t per  across h o s p i t a l s .  be  chapter.  T h i s study examines"the c o n c e p t u a l extent  a s s i g n weights to  From t h i s p r o c e s s we  the patient  can h o p e f u l l y i n f e r which method,  i f e i t h e r , can be an e f f e c t i v e i n s t r u m e n t f o r budgetary purposes.  12  Reference Notes, Chapter 1  1.  T h i s c h a p t e r d i s c u s s e s reasons f o r h o s p i t a l c o s t i n c r e a s e s i n Canada. References to a d i s c u s s i o n o f U.S. h o s p i t a l c o s t i n c r e a s e s i n c l u d e F e l d s t e i n (1971), S a l k e v e r (1972), Baron (1974), J e f f e r s and S i e b e r t (1974), C h a s s i n (1978), Hughes, Baron, Dittman e t a l . (1978), Zubkoff, R a s k i n , Hanft (1978).  2.  Another study undertaken a t t h i s time to l o o k s p e c i f i c a l l y a t c o s t s i s F r a s e r (1971).  3.  Budgets a r e developed on a l i n e - b y - l i n e b a s i s f o r each o f the major hospital a c t i v i t i e s . However, once the t o t a l budget i s d e c i d e d , i t i s g i v e n to the a d m i n i s t r a t o r as a " g l o b a l " budget f o r him (her) to use a t h i s (her) d i s c r e t i o n . (S)He i s not t i e d to the l i n e - b y - l i n e e s t i m a t e i n h i s (her) a l l o c a t i o n o f the f u n d s .  hospital  13  Chapter H o s p i t a l Cost  Studies:  2.  A C r i t i c a l Review of the L i t e r a t u r e  w i t h S p e c i a l A t t e n t i o n to Output  T h i s chapter  i s a review of s t u d i e s which examine the r e l a t i o n s h i p  between h o s p i t a l c o s t and i n c l u d e s the U n i t e d c a r e systems ( i f not o r g a n i z a t i o n and sons and  Standardization  output.  S t a t e s and  I t i s not c o n f i n e d  to Canada but  B r i t a i n because s i m i l a r i t i e s between h e a l t h  i n terms of i n s u r a n c e ,  d e f i n i t e l y i n terms of  d e l i v e r y of s e r v i c e s and m e d i c a l t e c h n o l o g y ) make compari-  generalizations possible.  These s t u d i e s are grouped a c c o r d i n g were attempting identified: studies.  to answer a t the time.  the  The  Two  the  'reimbursement'  'economies of s c a l e ' s t u d i e s were a response to the size for a hospital?"  they  major groups have been  'economies of s c a l e ' s t u d i e s and  "What i s the o p t i m a l estimating  to the p o l i c y q u e s t i o n s  They were concerned  the long run h o s p i t a l c o s t curve as a means to  the h o s p i t a l s i z e at which u n i t c o s t s were m i n i m i z e d .  question,  with  determining  This i n t e r e s t  was  h i s t o r i c a l l y r e l a t e d to the massive h o s p i t a l c o n s t r u c t i o n programs t h a t developed from the passage of the H i l l Burton Act S t a t e s and 1975,  (1946) i n the  the N a t i o n a l H e a l t h Grant Program (1948) i n Canada.  13-14)  The  (Le  Clair,  'reimbursement' s t u d i e s , on the o t h e r hand, were a  response to the r a p i d l y i n c r e a s i n g c o s t of o p e r a t i n g first  e a r l y s e v e n t i e s , "How  contain/control hospital costs?"  do we  these s t u d i e s had  average c o s t c u r v e .  posed a t the end  hospitals, in  p a r t i c u l a r to the q u e s t i o n ,  undertaking  United  of the s i x t i e s  s h i f t e d t h e i r focus t o the s h o r t  They were attempting  to e s t i m a t e  the  and  Researchers run  cost-output  r e l a t i o n s h i p i n order to improve e f f i c i e n c y i n the h o s p i t a l system through  14  the reimbursement p r o c e s s .  The major i s s u e c o n f r o n t e d  c o n d u c t i n g these s t u d i e s was devised  ions underlying  researchers  the problem of measuring output a c c u r a t e l y .  ive usefulness questions  background from which the s t u d i e s were d e r i v e d ,  of the s t u d i e s , and  they were  They  below.  these s t u d i e s i n d e t a i l , the broad t h e o r e t i c a l assumpt-  the t w o m a j o r groups a r e examined, as t h i s o f f e r s  on the c o n c e p t u a l  perspective the  relat-  t h e i r s u c c e s s i n answering the p o l i c y  addressing.  T h e o r e t i c a l Assumptions The  age  the  a v a r i e t y o f s t a n d a r d i z a t i o n methods which w i l l be d i s c u s s e d  Before analysing  2.1.  by  a u t h o r s o f the  'economies of; s c a l e ' s t u d i e s h y p o t h e s i z e t h a t 1  aver-  h o s p i t a l c o s t s i n i t i a l l y d e c l i n e as s i z e i n c r e a s e s as a consequence of  the s p e c i a l i z a t i o n o f some f a c t o r s of p r o d u c t i o n i b l e nature of others w i t h an  ("lumpy" i n p u t s ) .  and  because of the  indivis-  In o t h e r words they assume t h a t  i n c r e a s e i n the s i z e of the h o s p i t a l , t h e r e i s g r e a t e r s p e c i a l i z a t i o n  of t a s k s performed, w i t h a r e s u l t i n g i n c r e a s e i n p r o d u c t i v i t y . w i t h an i n c r e a s e in. h o s p i t a l s i z e , more e f f i c i e n t use  there are more p a t i e n t s and  of equipment and  t h a t beyond a c e r t a i n s i z e , c o s t s  facilities.  Moreover, a presumed  They h y p o t h e s i z e f u r t h e r  (diseconomies) a s s o c i a t e d w i t h the  t r a t i o n of a l a r g e h o s p i t a l , outweigh  t  the economies due  to l a r g e  adminis-  scale  operation. The groups.  authors u n d e r t a k i n g the One  'reimbursement' s t u d i e s a r e s p l i t i n t o  two  group assumes t h a t i t can e s t i m a t e the t e c h n i c a l c o s t c u r v e f o r  a group o f h o s p i t a l s , because i t b e l i e v e s c e r t a i n t e c h n i c a l r e l a t i o n s h i p s hold.  There e x i s t s the presumption t h a t i t i s p o s s i b l e to i n t r o d u c e  t i v e s i n t o the system, improve e f f i c i e n c y and is paradoxical—underlying  contain costs.  exist.  However, t h i s  the assumption t h a t a t e c h n i c a l c o s t curve can  r e a d i l y e s t i m a t e d i s an assumption t h a t i n b u i l t p r e s s u r e s already  incen-  be  towards e f f i c i e n c y  Perhaps h o s p i t a l s e x h i b i t i n g p o s i t i v e r e s i d u a l s from  the  15  e s t i m a t e d c o s t f u n c t i o n are assumed to d i s p l a y the i n e f f i c i e n c y which r e q u i r es c o r r e c t i o n .  The  o t h e r group does not make an assumption, i m p l y i n g  able cost minimization.  For  t h i s l a t t e r group, i t may  c i p l e to d e f i n e a t e c h n i c a l c o s t c u r v e , but cannot be  automatically:'inf erred  hospitals.  hospitals.  from the o b s e r v a b l e o p e r a t i o n  through the reimbursement p r o c e s s and creases.  However, they do not  of the  hypotheses p o s t u l a t e d  'reimbursement' s t u d i e s  therefore,  control h o s p i t a l cost i n -  claim that absolute e f f i c i e n c y i s achievable  i n the  are p r e d i c a t e d  theory w i l l be b r i e f l y d e s c r i b e d  exist.  'economies of s c a l e ' s t u d i e s and on  the b a s i s  here.  assumptions r e p r e s e n t u s e f u l a b s t r a c t i o n s Cost Theory of the  some  of a c o n c e p t u a l  theory of the  Then i t w i l l be  the a c t u a l c h a r a c t e r i s t i c s o f the h o s p i t a l i n d u s t r y  2.2.  inefficient  improve r e l a t i v e e f f i c i e n c y  framework drawn o r i g i n a l l y from the n e o c l a s s i c a l c o s t This  'real l i f e '  the b e h a v i o u r of a group of  because the m o t i v a t i o n towards a b s o l u t e e f f i c i e n c y does not The  of  i d e n t i f y i n g the r e l a t i v e l y e f f i c i e n t or r e l a t i v e l y  They h y p o t h e s i z e t h a t they can  in prin-  such a c o s t - o u t p u t r e l a t i o n  They are concerned w i t h d e s c r i b i n g  h o s p i t a l s and  be p o s s i b l e  inevit-  firm.  compared w i t h  to a s s e s s whether these  for this particular  industry.  The  Neoclassical  Firm  The  d e r i v a t i o n o f the c o s t c u r v e , a c c o r d i n g to t r a d i t i o n a l economic  t h e o r y , r e s t s on a major a s s u m p t i o n — t h e r a t i o n a l p u r s u i t of maximization.  profit  As a minimum p r e r e q u i s i t e , i t must be assumed t h a t  t e c h n i c a l l y optimum output from any achievable i n practice.  the  combination of p r o d u c t i v e f a c t o r s i s  D i f f e r e n t amounts of each of the  t h r e e major  inputs,  or f a c t o r s o f p r o d u c t i o n ( l a n d , l a b o u r , c a p i t a l ) w i l l produce a p a r t i c u l a r l e v e l of output.. by  However, the a c t u a l combination of i n p u t s  chosen  the f i r m w i l l depend on the r e l a t i v e p r i c e s of these f a c t o r s  of  16  p r o d u c t i o n as w e l l as the these i n p u t s  t e c h n i c a l e f f i c i e n c y of the  i n t o a given l e v e l of output.  p r e d i c t s that  the f i r m w i l l c o n s i d e r ,  T r a d i t i o n a l economic t h e o r y  f o r any  l e v e l of output,  minimum-cost combination of f a c t o r s of p r o d u c t i o n . output of the requires  f i r m w i l l be  f i r m to c o n v e r t  The  the  chosen l e v e l  t h a t f o r which p r o f i t s are maximized,  the j u x t a p o s i t i o n of a demand or revenue curve w i t h the  of  and cost  curve. To accommodate r e a l i s t i c a l l y the the combination of i n p u t s  time i t takes f o r a f i r m to a l t e r  so as to a c h i e v e the e c o n o m i c a l l y most  efficient  l e v e l of output, economists have adopted a t i m e - p e r i o d a n a l y s i s .  In  p a r t i c u l a r , the  which  the  quantity  varied  'short  run'  of some i n p u t s  i n the  short  i s assumed to be a time p e r i o d cannot be v a r i e d .  'long  run'  The  ( e s p e c i a l l y l a b o u r and  l o o s e l y r e f e r s to the time p e r i o d  of p r o d u c t i o n may  which cannot  run a r e c a l l e d f i x e d f a c t o r s ; those t h a t can  v a r i e d are c a l l e d v a r i a b l e f a c t o r s The  Factors  during  be v a r i e d  during  ( i n p a r t i c u l a r , p l a n t and  shape of the f i r m ' s  be  materials).  which a l l f a c t o r s  equipment).  c o s t curve i s dependent upon t e c h n i c a l  f a c t o r s regarding  the complementarity of v a r i a b l e amounts of f a c t o r s  production.  This  t e c h n i c a l aspect i s embodied i n the  proportions'  or  'diminishing  of v a r i a b l e f a c t o r s  (and  returns'.  the p o i n t  maximum.  Any  diminishing employed.  at which the greater  returns,  law  of  of  'variable  There e x i s t s a p a r t i c u l a r l e v e l  a r e s u l t i n g l e v e l of output) which i s most  c o m p a t i b l e w i t h the g i v e n l e v e l of by  be  'fixed' factors.  This  i s represented  average product of the v a r i a b l e f a c t o r s i s a t  a  a p p l i c a t i o n of v a r i a b l e f a c t o r s w i l l r e s u l t i n l o w e r i n g the average product o f a l l v a r i a b l e  factors  17  The  a n a l y s i s i s t y p i c a l l y c a r r i e d out a t the l e v e l of a s i n g l e -  product f i r m , the n a t u r e o f the product being  assumed to be unchanged  (or homogenous) f o r t h e p e r i o d under c o n s i d e r a t i o n .  Having d e f i n e d  these  assumptions and c o n d i t i o n s , we a r e now i n a p o s i t i o n t o d e s c r i b e t h e shape of s h o r t run c o s t curves f o r t h e f i r m , which may be from product  constructed  curves.  Output (i)  Output  T o t a l c o s t curve  Figure  2.1.  ( i i ) Marginal curve  The Short Run Cost S t r u c t u r e Theory o f the F i r m .  I t can be seen i n F i g u r e  i n the N e o c l a s s i c a l  2.1 t h a t t h e average v a r i a b l e c o s t  reaches a minimum and then r i s e s . product p e r worker i s maximized  and average c o s t  curve  With f i x e d f a c t o r p r i c e s , when average  (assuming an a p p r o p r i a t e  m a t e r i a l s ) , average v a r i a b l e c o s t i s a t a minimum.  u t i l i z a t i o n of  When output p e r  18  worker I s r i s i n g w i t h output, t h e v a r i a b l e c o s t p e r u n i t o f output i s f a l l i n g ; when output p e r worker i s f a l l i n g , t h e v a r i a b l e c o s t p e r u n i t of output i s r i s i n g .  The law o f d i m i n i s h i n g  i n c r e a s i n g average v a r i a b l e c o s t .  returns  The same phenomena can be  by a r i s i n g m a r g i n a l c o s t c u r v e , showing the r i s i n g p r o d u c i n g an a d d i t i o n a l l e v e l  eventually represented  incremental  c o s t of  of o u t p u t .  Different technical considerations The  implies  are relevant  i n the long r u n .  long r u n average c o s t curve i s t h e l e a s t c o s t method o f p r o d u c i n g  each p o s s i b l e l e v e l o f output when a l l t h e f a c t o r s a r e f r e e t o be v a r i e d . T h i s c u r v e i s determined by t h e a l t e r n a t i v e t e c h n o l o g i e s  presently  con-  c e i v a b l e t o t h e i n d u s t r y and by t h e p r i c e s o f t h e f a c t o r s of p r o d u c t i o n . Thus t h e long r u n average c o s t c u r v e , i n g r a p h i c  terms, d i v i d e s t h e c o s t  l e v e l s t h a t a r e a t t a i n a b l e w i t h known t e c h n o l o g y and g i v e n from those t h a t a r e u n a t t a i n a b l e .  Figure  2.2.  (See F i g u r e  2.2.)  The Long Run Cost S t r u c t u r e i n the N e o c l a s s i c a l Theory o f the F i r m .  factor prices,  19  The a c t u a l b e h a v i o r or performance of the f i r m a l s o depends on the market s t r u c t u r e or the c h a r a c t e r i s t i c s of market o r g a n i z a t i o n the f i r m o p e r a t e s .  There a r e many a s p e c t s of the market s t r u c t u r e which  a f f e c t t h e behaviour of the f i r m — t h e the number of f i r m s  i n which  ease of e n t e r i n g t h e i n d u s t r y ,  i n t h e i n d u s t r y , and the extent  t o which a p a r t i c u l a r  f i r m can i n f l u e n c e the demand f o r the p r o d u c t , e.g. through a d v e r t i s i n g . Economists have emphasised a few t h e o r e t i c a l market s t r u c t u r e s t h a t a r e meant to r e p r e s e n t  t h e extreme cases of t h e types of markets t h a t a r e  s a i d t o e x i s t i n a market s o c i e t y , v i z . , p e r f e c t c o m p e t i t i o n  and monopoly.  These t h e o r e t i c a l models d i f f e r predominantly w i t h r e s p e c t number of c o m p e t i t o r s i n t h e i n d u s t r y .  t o the  However, i t i s n e c e s s a r y t o  emphasise t h a t t h e r e a r e a number of assumptions about the behaviour of the f i r m t h a t apply theory  described  to a l l models.  here—technical  These i n c l u d e t h e assumptions of c o s t  efficiency  (short run), diminishing  r e t u r n s and product h o m o g e n e i t y — a s w e l l as other the demand and supply  curves of the i n d u s t r y .  t i o n s of demand and supply underlying  One of the major assump-  a n a l y s i s i s the independence of the f o r c e s  t h e s e two c u r v e s ,  i . e . t h e l e v e l o f demand i s exogenous and  i s not determined by t h e l e v e l of 2.3.  assumptions r e l a t e d t o  supply.  P e c u l i a r i t i e s ' o f the H o s p i t a l The framework of c o n v e n t i o n a l  Industry"^ microeconomic theory  needs to be  compared w i t h t h e a c t u a l c h a r a c t e r i s t i c s of the h o s p i t a l i n d u s t r y t o determine whether the assumptions u n d e r l y i n g  t h i s theory  are a p p l i c a b l e  to t h e h o s p i t a l i n d u s t r y . A cursory  g l a n c e suggests t h a t t h i s  i s not the c a s e .  Most  h o s p i t a l s a r e n o t - f o r - p r o f i t , so t h e h o s p i t a l does not have p r o f i t m a x i m i z a t i o n as i t s major g o a l .  The aim o f t h e h o s p i t a l i s p r o b a b l y  20  best  r e p r e s e n t e d as an i n t e n t i o n to break even, on average.  i t may  Occasionally  i n c u r a s h o r t f a l l or a s u r p l u s but n e i t h e r of these o p t i o n s  p e r s i s t because a c o n s t a n t s h o r t f a l l would f o r c e the h o s p i t a l to through bankruptcy and  a s u r p l u s would e v e n t u a l l y  result in a  can close  reduction  of funds from the r e i m b u r s i n g agency. As  a c o r o l l a r y to the absence of the p r o f i t motive, we  whether the h o s p i t a l makes a s y s t e m a t i c  attempt to minimize  A l t h o u g h i t may  be  it  to a s c e r t a i n whether they a c t u a l l y do.  is difficult  i s not  It v a r i e s according  outpatient  care,  to i t s range of  teaching,  research,  question  costs.  s o c i a l l y d e s i r a b l e f o r h o s p i t a l s t o minimize  homogenous.  i n p a t i e n t care,  must  Hospital  costs, output  activities—  e t c . and  i t varies  w i t h i n each of these a c t i v i t y groups (e.g. d i f f e r e n t diagnoses among inpatients).  Thus the output of a h o s p i t a l must be  account of these product d i f f e r e n c e s i f we  are  standardized  to take  to b e g i n to compare  the  e f f i c i e n c y of h o s p i t a l s . Moreover we or i n p u t s  suspect a. p r i o r i t h a t the a c t u a l combination of  for a particular patient  combination.  i s u n l i k e l y to be  T h i s combination of s e r v i c e s i s not  f i n a n c i a l managers of the h o s p i t a l , but the h o s p i t a l .  (S)he  of income i s not (s)he has  no  i s not  u s u a l l y p a i d by  the l e a s t c o s t  determined by  the h o s p i t a l , h i s  because the  (her)  uses level  (her) p a t i e n t  t h a t the p a t i e n t i s t r e a t e d  so  for a  Thus the combination of p r o c e d u r e s , t e s t s , drugs, e t c . ,  which (s)he o r d e r s f o r the p a t i e n t , i s not n e c e s s a r i l y the combination.  the  the p h y s i c i a n who  dependent on the c o s t of t r e a t i n g h i s  i n t e r e s t i n ensuring  minimum c o s t .  r a t h e r by  services  least-cost  Furthermore, the l e a s t - c o s t combination i s r a r e l y known technology i t s e l f of the  industry  i s not  f i x e d , but  left  to  21  the i n d i v i d u a l d i s c r e t i o n of the m e d i c a l p r a c t i t i o n e r .  So t h e r e i s no  a p r i o r i l e v e l of t e c h n i c a l e f f i c i e n c y f o r a g i v e n d i a g n o s i s .  This  r e s u l t s i n the r a t h e r absurd s i t u a t i o n where h o s p i t a l a d m i n i s t r a t o r s expected to promote e f f i c i e n c y , but have l i t t l e tion  (treatment) process  the d o c t o r s .  p a t i e n t does not  produc-  'output' ( p a t i e n t s ) , which i s l e f t  T h i s p e c u l i a r o r g a n i z a t i o n a l phenomenon has  to as the h o s p i t a l ' s two The  of t h e i r  c o n t r o l over the  l i n e s of a u t h o r i t y usually question  the n a t u r e of h i s (her) i l l n e s s and  (Smith, 1955). the treatment recommended  because (s)he i s not  r e s p o n s i b l e f o r payment of s e r v i c e s r e c e i v e d .  by about  usually  In Canada and  i s covered by n a t i o n a l h e a l t h i n s u r a n c e  c o s t s are borne almost s o l e l y by  to  been r e f e r r e d  the p h y s i c i a n both because (s)he does not have complete i n f o r m a t i o n  the p o p u l a t i o n  are  Britain,  so t h a t h o s p i t a l  the government; i n the U n i t e d  States  2 about 90 p e r c e n t  of the p o p u l a t i o n have some form of h o s p i t a l  through p r i v a t e or p u b l i c (Medicare and M e d i c a i d ) s o u r c e s . c u l t f o r the r e i m b u r s i n g insurance  insurance  It i s  diffi-  t h i r d p a r t i e s (be i t the government or p r i v a t e  companies) to monitor the i n d i v i d u a l c o s t s of s e r v i c e s because  the heterogenous n a t u r e of the h o s p i t a l product makes i t d i f f i c u l t estimate for  a cost-output  r e l a t i o n s h i p and  a p a r t i c u l a r diagnosis.  The  to d e r i v e a ' r e p r e s e n t a t i v e '  c o s t depends on the case mix  of the h o s p i t a l , s e v e r i t y of d i s e a s e , h o s p i t a l s i z e and and  the range of h o s p i t a l a c t i v i t i e s  etc.).  to  complexity  utilization  (inpatient, outpatient,  cost  rate  education,  These v a r i a b l e s have to be c o n t r o l l e d s y s t e m a t i c a l l y i n  any  attempt to compare c o s t s a c r o s s h o s p i t a l s . The and  l a c k of i n f o r m a t i o n  a v a i l a b l e to p a t i e n t s about the  quantity  type of s e r v i c e s r e q u i r e d means t h a t the aggregate demand curve f o r  the h o s p i t a l i n d u s t r y i s not  exogenously determined.  Patients  express  22  t h e i r demand f o r s e r v i c e s by the  seeking m e d i c a l c a r e but  influenced  by  n a t u r e and  l e v e l of u t i l i z a t i o n .  t h i s demand i s  s u p p l i e r of s e r v i c e s , the d o c t o r , who  manipulates  In o t h e r words the p h y s i c i a n  responds  to the demand f o r c a r e by d e c i d i n g what the p a r t i c u l a r s e r v i c e mix be  will  f o r each p a t i e n t . T h i s n e c e s s a r i l y b r i e f d e s c r i p t i o n of the h o s p i t a l  suggests t h a t the assumptions of n e o c l a s s i c a l c o s t readily applicable. and  The  heterogenous, o f t e n  industry  theory may  not  i l l - d e f i n e d product  be mix,  the absence of a p r o f i t motive, make c o s t m i n i m i z a t i o n an u n l i k e l y  behaviour f o r the h o s p i t a l s e c t o r . long  Thus the attempted d e r i v a t i o n of  run average c o s t c u r v e i n order to determine whether or not  s c a l e e x i s t : i n the h o s p i t a l i n d u s t r y  i s misdirected.  I t i s not  .that ther.e has developed no consensus of the s i z e of the most !;  h o s p i t a l or on  the  shape of the  long run  Table 'Economies of S c a l e '  C a r r and  Feldstein  Francisco  No Taylor  Summary of  Strong  Yes  This  Findings Minimum Long Run Average Cost P o i n t Terms of Beds  in  560 - 790 depending on measure of q u a l i t y 300 - 900 depending on e q u a t i o n specification (U.K. data)  Feldstein  Source:  efficient  No  Yes,  Lave  surprising  190  Cohen  Lave and  economies  curve.  Yes Yes  a  2.1.  Studies:  Berry  Ingbar and  average c o s t  E x i s t e n c e of Economies of S c a l e  Researcher  M.  the  No i s a modified version  of T a b l e 5-1  i n Berki  (1972)  23  T a b l e 2.1  summarizes the f i n d i n g s of these r e s e a r c h e r s whose  s t u d i e s are d i s c u s s e d r e s u l t s beg  the  i n d e t a i l l a t e r i n t h i s chapter.  question,  " I s i t at a l l a p p r o p r i a t e  determine the o p t i m a l s i z e of a h o s p i t a l ? " do,  i t i s not  or r e l e v a n t  to  Even i f i t were p o s s i b l e  to  r e a l l y f e a s i b l e to b u i l d o p t i m a l s i z e d h o s p i t a l s a l l over  the c o u n t r y f o r at l e a s t two e f f i c i e n c y i s not  the  Second, i t may  reasons:  first,  individual hospital  sole c r i t e r i o n for locating hospitals.  f a c t o r s such as p o l i t i c s and tion.  Their c o n f l i c t i n g  not  Other  a c c e s s i b i l i t y a r e a l s o taken i n t o  be an e c o n o m i c a l l y e f f i c i e n t  considera-  s o l u t i o n anyway,  when viewed i n terms of the t o t a l h o s p i t a l system, because the  savings  r e s u l t i n g .from economies of s c a l e must be balanced a g a i n s t  additional  transportation  c o s t s a r i s i n g from a s m a l l e r  the  number of e v e n l y d i s t r i b u t e d  hospitals.^ The  early incentive  unsuccessful  'reimbursement' s t u d i e s were s i m i l a r l y  i n t h e i r attempts to i d e n t i f y e f f i c i e n c y .  t h e i r d i f f i c u l t i e s w i l l be to n o t e t h a t  discussed  the u n d e r l y i n g  claim  by  t h a t h o s p i t a l s are  looking  Pauly  By attempting to i d e n t i f y t e c h n i c a l  itself  i s paradoxical.  a t h o s p i t a l b e h a v i o u r , one  Evans (1971) and of  the  On  the one  i n e f f i c i e n t because of t h e i r odd  ( l a c k of a p r o f i t m o t i v e ) .  (1970) examines and  tradition  to  the  ( c o s t m i n i m i z a t i o n , product homogeneity) t h a t do  In f a c t the a n a l y s i s  structure  It i s sufficient  they assume a number of t e c h n i c a l r e l a t i o n s h i p s f o r  hospital industry hold.  reasons f o r  assumptions of t h e i r a n a l y s i s l e d  misguided p o l i c y i m p l i c a t i o n s . efficiency,  more f u l l y below.  The  On can  not  hand, they  incentive  the o t h e r hand they assume t h a t , identify technical efficiency.  r e f l e c t s upon t h i s paradox.  l a t e r Evans and  Walker (1972) broke from  e a r l i e r s t u d i e s by not  the  attempting t o i n f e r t h a t  the  24  a c t u a l c o s t - o u t p u t r e l a t i o n they were e s t i m a t i n g r e p r e s e n t e d the t e c h n o l o g i c a l c o n s t r a i n t s under which any h o s p i t a l system has t o o p e r a t e . Rather  the a c t u a l c o s t - o u t p u t r e l a t i o n may  be the r e s u l t of e i t h e r  t e c h n o l o g i c a l c o n s t r a i n t s or of ' b e h a v i o u r a l ' p a t t e r n s . ready means of i s o l a t i n g the t e c h n o l o g i c a l f a c t o r s .  There i s no  So the most one  can  assume from f i t t i n g a c o s t - o u t p u t r e l a t i o n f o r a group of h o s p i t a l s i s t h a t one  can o n l y d e s c r i b e the way  d i s t r i b u t i o n around the average  those h o s p i t a l s "behave", i . e . t h e i r  l e v e l of e f f i c i e n c y .  more e f f i c i e n t p a t t e r n of h o s p i t a l behaviour  I f some u n d e r l y i n g ,  e x i s t s , i t w i l l not  be  d i s c o v e r e d u s i n g t h i s methodology. Evans was r e l a t i o n who  the f i r s t  r e s e a r c h e r examining  stated e x p l i c i t l y  the h o s p i t a l c o s t - o u t p u t  t h i s d i f f e r e n c e between d e f i n i n g  technology and d e s c r i b i n g h o s p i t a l behaviour methodology t o a c h i e v e the former.  and  the l i m i t a t i o n s of the  Subsequent i n v e s t i g a t i o n s i n the  a r e a , l o o k i n g a t ways t o s t a n d a r d i z e h o s p i t a l output purposes,  hospital  f o r reimbursement  acknowledge t h a t they can o n l y hope t o improve the  relative  e f f i c i e n c y of h o s p i t a l s .  So they admit, by i m p l i c a t i o n , t h a t they a r e  o n l y d e s c r i b i n g behaviour  f o r the group of h o s p i t a l s being s t u d i e d .  It  i s these r e s e a r c h e r s , b e g i n n i n g w i t h Evans, whose work form the  second  group of reimbursement s t u d i e s . Having  p r o v i d e d both the p o l i c y content and  work w i t h i n which t h e s e two  the t h e o r e t i c a l frame-  groups of c o s t s t u d i e s developed,  to d e s c r i b e them i n more d e t a i l ,  we  proceed  i n p a r t i c u l a r the ways i n which they  4 have a d j u s t e d f o r the output h e t e r o g e n e i t y of the h o s p i t a l .  25  2.4.  'Economies of S c a l e ' Carr and  Studies  F e l d s t e i n (1967) estimated an aggregate long run  total  c o s t f u n c t i o n u s i n g m u l t i p l e r e g r e s s i o n a n a l y s i s on a sample of voluntary,  s h o r t term g e n e r a l h o s p i t a l s i n the U n i t e d  States.  dependent v a r i a b l e i n the m u l t i p l e r e g r e s s i o n e q u a t i o n was The  3147 The  total  cost.  f a c t o r s which were expected to a f f e c t c o s t s were i n c l u d e d as  inde-  pendent v a r i a b l e s .  These v a r i a b l e s were measures of s i z e  ( p a t i e n t days,  2 (PD)  and  PD  )) and measures of f a c i l i t i e s ,  of f a c i l i t i e s  and  s e r v i c e s , ( S ) ) , number of f a c i l i t i e s  of p a t i e n t days (S x PD), a professional nursing  number of o u t p a t i e n t  school  of types of i n t e r n s h i p and i n t e r n s and The  residents  (NS),  residency  programs o f f e r e d  (OPV), e x i s t e n c e  There was,  (MS). there  h o s p i t a l s i z e i n c r e a s e s , average c o s t p a t i e n t s and  however, an unexpected r e s u l t .  c o e f f i c i e n t of the major v a r i a b l e (S x PD),  which was  intended  T h i s i m p l i e d t h a t c o s t s were d e c r e a s i n g  numbers of s e r v i c e s and F e l d s t e i n expected.  patient d a y s — t h e opposite  They e x p l a i n e d  to  A second a n a l y s i s was  they p r o v i d e .  to the number of f a c i l i t i e s ,  The  and  t h a t t h i s unexpected r e s u l t was  A s e p a r a t e r e g r e s s i o n e q u a t i o n was  group of h o s p i t a l s .  with increasing  PD  undertaken to c o n t r o l f o r t h i s e f f e c t .  were grouped a c c o r d i n g  signifi-  to what C a r r  to a h i g h c o r r e l a t i o n between the t h r e e v a r i a b l e s , S x PD,  then  The  f o r v a r i a t i o n i n h o s p i t a l p a t i e n t s or output, was  cantly negative.  of  (IRP), number of  with a medical school  i t reaches a minimum l e v e l at about 190  i t begins to r i s e .  times the number  c o n s i s t e n t w i t h the h y p o t h e s i s t h a t  e x i s t c o s t economies to s c a l e — a s  standardize  visits  programs (number  number of student nurses (N), number  (IR), a f f i l i a t i o n  major f i n d i n g was  declines u n t i l  s e r v i c e s , and  and  due 2  PD  .  Hospitals  s e r v i c e s and  programs  c a l c u l a t e d f o r each  r e s u l t s showed t h a t economies of s c a l e "appear  26  to e x i s t over a wide range o f s i z e s i n each of t h e s e r v i c e c a p a b i l i t y groups" (Carr and F e l d s t e i n , 1967, 61).  However, the shape o f the  c u r v e s f o r each o f these s e r v i c e c a p a b i l i t y groups a r e n o t v e r y and  t h e d i f f e r e n c e i n t h e average c o s t p e r p a t i e n t  and  t h e bottom of t h e s t e e p e s t  statistically  day between t h e top  c u r v e i s o n l y about $7—which may be  s i g n i f i c a n t but i s i n s i g n i f i c a n t i n p o l i c y terms.  (1967) was a l s o concerned w i t h i s o l a t i n g t h e e f f e c t s o f  Berry  h o s p i t a l s i z e on c o s t . short  steep,  He c a t e g o r i z e d  5293 o f t h e 5684  non-federal,  term g e n e r a l and o t h e r s p e c i a l h o s p i t a l r e g i s t e r e d  i n 1963, i n t o  40 groups, a c c o r d i n g t o t h e a v a i l a b i l i t y o r n o n a v a i l a b i l i t y o f 28 f a c i l i t i e s and s e r v i c e s .  The r e l a t i o n s h i p between average c o s t and t h e  l e v e l of output was measured f o r t h e 40 groups o f h o s p i t a l s u s i n g regression  a n a l y s i s w i t h average c o s t p e r p a t i e n t  v a r i a b l e and t o t a l p a t i e n t  multiple  day as t h e dependent  days a s t h e independent v a r i a b l e .  The average  c o s t c u r v e of h o s p i t a l s w i t h a g i v e n number of f a c i l i t i e s and s e r v i c e s d e c r e a s e s as output i n c r e a s e s is statistically significant discusses  i n 36 out o f t h e 40 groups a n a l y s e d .  s i g n i f i c a n t f o r 26 of t h e s e 36 e q u a t i o n s but n o t always  i n p o l i c y terms.^  In a l a t e r paper, B e r r y  been made."  proprietary,  multiple  patient  day.  t o t a l ) and e s t i m a t e s a c o s t  regression  analysis.  (government, e q u a t i o n f o r each  The dependent v a r i a b l e i s c o s t p e r  The l e v e l o f output i s measured by t h e average d a i l y census.  Product mix i s a d j u s t e d f o r by 40 independent v a r i a b l e s : variables representing representing  adjustments  He groups t h e 6000 s h o r t  term g e n e r a l h o s p i t a l s f o r 1965 by n a t u r e o f c o n t r o l  using  (1970, 69)  "ways t o employ t h e a v a i l a b l e data t o make b e t t e r  f o r product mix than have h e r e t o f o r e  voluntary,  This  7 dummy  a c c r e d i t a t i o n and a p p r o v a l ; 27 dummy v a r i a b l e s  t h e a v a i l a b i l i t y o f f a c i l i t i e s and s e r v i c e s ; t h e average  27  length of stay;  the proportion  of o u t p a t i e n t  activity;  t h e p r o p o r t i o n of  b i r t h s ; and t h e number of student n u r s e s , m e d i c a l students and other t r a i n e e s per p a t i e n t .  Approximately 25 p e r c e n t o f t h e v a r i a t i o n i n c o s t  per p a t i e n t day f o r a l l short the  included v a r i a b l e s .  term g e n e r a l  h o s p i t a l s a r e e x p l a i n e d by  B e r r y found a c e r t a i n amount o f m u l t i c o l l i n e a r i t y  among the 40 v a r i a b l e s and s i n c e they c o n t r i b u t e d e x p l a n a t o r y power o f t h e c o s t further analysed.  Factor  s i g n i f i c a n t l y to the  e q u a t i o n s , he d e c i d e d they should be  a n a l y s i s was a p p l i e d t o t h e 40 v a r i a b l e s i n an  attempt t o i d e n t i f y a few s i g n i f i c a n t common f a c t o r s which would v a r i a t i o n s i n t h e product mix of h o s p i t a l s . meaningful f a c t o r s i n any a n a l y s i s o f Berry  which he c l a i m s  Berry i d e n t i f i e d  can be used t o a d j u s t  eight  f o r product mix  t h e r e l a t i o n s h i p between h o s p i t a l c o s t s and output.  (1973) d e c i d e d t o examine whether t h e r e was a  systematic  pattern  t o t h e a v a i l a b i l i t y of f a c i l i t i e s and s e r v i c e s i n s h o r t  general  hospitals.  i n h o s p i t a l s of d i f f e r e n t  (measured i n terms o f t o t a l number of f a c i l i t i e s ) .  of h o s p i t a l s were d e f i n e d : special.  o t h e r group on t h e s c a l e .  Thus t h e groups, from b a s i c t o s p e c i a l , a r e  by an i n c r e a s i n g number and d i v e r s i t y o f s e r v i c e s .  B e r r y ' s i n i t i a l grouping  This  and comprehensive than  (based on f a c t o r a n a l y s i s ) because i t i s a  c u m u l a t i v e measure, thereby i n t r o d u c i n g Berry  categories  and s e r v i c e s common t o each  c a t e g o r i z a t i o n of h o s p i t a l s was more s y s t e m a t i c  groups.  Five  b a s i c , q u a l i t y enhancing, complex, community,  A b a s i c h o s p i t a l has f a c i l i t i e s  characterized  term  He developed a m a t r i x t o determine t h e most r e p r e s e n -  t a t i v e combination o f s e r v i c e s and f a c i l i t i e s sizes  represent  (1974) b u i l t  an index of r e l a t i v i t y  into the  t h i s c o m p l e x i t y of scope of s e r v i c e s i n t o a  more d e t a i l e d a n a l y s i s o f h o s p i t a l c o s t .  He d e f i n e d  the cost  function  i n terms o f l e v e l of output, q u a l i t y o f s e r v i c e s , product mix, f a c t o r  28  prices, efficiency.  e f f e c t o f these f a c t o r s on h o s p i t a l c o s t was  f o r a p p r o x i m a t e l y 6,000 h o s p i t a l s f o r the y e a r s 1965, 1966  analysed 1967.  The  The  a n a l y s i s provides  hospital cost. of s c a l e but  Berry  i n s i g h t i n t o the v a r i o u s  concludes t h a t h o s p i t a l s are  factors affecting  subject  to economies  the a b s o l u t e magnitudes are r a t h e r i n s i g n i f i c a n t .  more fundamental q u e s t i o n  i s what i s the o p t i m a l mix  scope o f s e r v i c e s or what i s the o p t i m a l mix  and  "A much  of c o m p l e x i t i e s o f  of types of h o s p i t a l s "  (Berry, 1974, 309). Francisco  (1970) uses a s i m i l a r t e c h n i q u e to B e r r y .  25 homogenous h o s p i t a l groups, based on v a r i o u s  He d e f i n e s  combinations o f the 16  f a c i l i t i e s / s e r v i c e s l i s t e d by the American H o s p i t a l A s s o c i a t i o n . R e g r e s s i o n a n a l y s i s o f average c o s t per p a t i e n t day  as a f u n c t i o n o f  ( t o t a l p a t i e n t days) were undertaken f o r these 25 groups o f  output  hospitals.  These r e s u l t s showed a n e g a t i v e  but weak r e l a t i o n s h i p between  u n i t c o s t s and.output w i t h o n l y seven s i g n i f i c a n t r e g r e s s i o n c o e f f i c i e n t s out o f t w e n t y - f i v e . existence  T h i s r e s u l t made F r a n c i s c o  o f economies o f s c a l e .  h o s p i t a l s and  However, s e p a r a t i n g  hand, e x h i b i t e d constant  returns  The  the  groups o f l a r g e  groups o f s m a l l h o s p i t a l s , he found s i g n i f i c a n t  of s c a l e f o r the s m a l l h o s p i t a l s .  The  reluctant to claim  l a r g e h o s p i t a l s , on the  economies other  to scale.  s t u d i e s reviewed so f a r are s i m i l a r i n t h a t they assume t h a t  h o s p i t a l s w i t h i d e n t i c a l o r s i m i l a r f a c i l i t i e s produce a r e l a t i v e l y homogenous o u t p u t . e r s not size.  T h i s same approach has  a l s o been adopted by other  research-  j u s t i n t e r e s t e d i n the r e l a t i o n s h i p between h o s p i t a l c o s t s I t has  been used to develop h o s p i t a l c l a s s i f i c a t i o n systems  Edwards, et a l . (1972), Berry  (1973), P h i l l i p and  Iyer  and [see  (1975), T r i v e d i  (1978)] f o r the purpose o f e v a l u a t i n g h o s p i t a l performance through  29 u t i l i z a t i o n review (e.g.,  comparisons of l e n g t h of s t a y ) , peer review,  q u a l i t y of c a r e s t u d i e s ; to a s s i s t i n h o s p i t a l s t a f f i n g , or i n d e t e r m i n i n g the o p t i m a l mix  of types of h o s p i t a l s ; to f a c i l i t a t e sampling procedures  when o n l y a few  h o s p i t a l s need to be  As a method of s t a n d a r d i z i n g p r e s e n t s problems.  studied.  h o s p i t a l output, however, t h i s approach  The main problem stems from i t s b a s i c assumption  that  the presence or absence of a f a c i l i t y or s e r v i c e i s a proxy f o r i d e n t i c a l numbers and  types of p a t i e n t s .  combination of f a c i l i t i e s and that w i t h i n  Hospitals  s e r v i c e s a v a i l a b l e and  s e r v i c e s and  there  each group have the  t h e s e s e r v i c e s are  type of p a t i e n t s  the  the assumption i s  same f a c i l i t i e s  and  s i m i l a r i n terms of s i z e , u t i l i z a t i o n  treated.  T h i s assumption i s too  i s l i k e l y to be a range i n the s i z e and  or s e r v i c e s f o r any  s i m p l i s t i c as  u t i l i z a t i o n of  p a r t i c u l a r group of h o s p i t a l s .  be a range i n the amount of s e r v i c e s consumed by given  to  each group each h o s p i t a l produces a homogeneous output. This.:  suggests t h a t h o s p i t a l s w i t h i n  r a t e s and  a r e grouped a c c o r d i n g  facilities  S i m i l a r l y there  the p a t i e n t s  in  will  any  group of h o s p i t a l s . To t h e i r c r e d i t , C a r r and  t h a t t h e i r use  F e l d s t e i n , B e r r y and  of s u r r o g a t e s was  Francisco  acknowledged  f a r from s a t i s f a c t o r y as a method of  s  standardizing  f o r h o s p i t a l product h e t e r o g e n e i t y .  t i o n on f a c i l i t i e s and recognized  s e r v i c e s was  that standardization  power i n e x p l a i n i n g  However t h i s i n f o r m a -  the o n l y data a v a i l a b l e to them.  i n terms of d i a g n o s i s  i n t e r - h o s p i t a l cost  Another problem w i t h these s t u d i e s  would have  greater  differences. i s t h a t they do not d i s t i n g u i s h  a d e q u a t e l y between the major a c t i v i t i e s of the h o s p i t a l — i n p a t i e n t outpatient it  c a r e and  teaching.  They  In making i n t e r - h o s p i t a l c o s t  care,  comparisons  i s n a t u r a l l y d e s i r a b l e to ensure t h a t c o s t comparisons are of s i m i l a r  30  outputs.  As i n p a t i e n t c a r e  i s t h e predominant h o s p i t a l a c t i v i t y , a  r i g o r o u s a n a l y s i s r e q u i r e s the i s o l a t i o n of i n p a t i e n t c o s t s from these other  activities.  Thus output h e t e r o g e n e i t y  d i f f e r e n c e s among h o s p i t a l a c t i v i t i e s  i s defined  i n terms of  (inpatient, outpatient,  product d i f f e r e n c e s w i t h i n t h e s e a c t i v i t i e s  e t c . ) and  ( t h e d i f f e r e n t types o f  inpatients). V a l i d c o s t comparisons, t h e r e f o r e , r e q u i r e adjustments f o r t h e a c t i v i t y mix of t h e h o s p i t a l .  T h i s c a n be done i n one o f two ways:  ( i ) by p l a c i n g , on t h e r i g h t hand s i d e of t h e h o s p i t a l c o s t  equation,  v a r i a b l e s which i n d i c a t e t h e l e v e l o f n o n - i n p a t i e n t a c t i v i t y ; ( i i ) by subt r a c t i n g from t h e average c o s t p e r case o r p a t i e n t day on t h e l e f t hand side of the equation, and  t h e c o s t a t t r i b u t a b l e to these a c t i v i t i e s .  Evans (1980, 14) present  Barer  t h e advantages and d i s a d v a n t a g e s o f each o f  these approaches and conclude t h a t t h e l a t t e r approach i s u s u a l l y d e s i r able.  Right  hand s i d e s t a n d a r d i z a t i o n r e q u i r e s a p o t e n t i a l l y long  list  of independent v a r i a b l e s i f i t i s t o be done a c c u r a t e l y which i s cumbersome and i s l i k e l y t o r e s u l t i n c o l l i n e a r i t y among  t h e many  out-  patient variables. C a r r and F e l d s t e i n , Berry and F r a n c i s c o ,  i n t h e s t u d i e s noted above,  adjust  f o r these a c t i v i t i e s on t h e r i g h t hand s i d e of t h e e q u a t i o n .  adjust  f o r teaching,  Berry  and F r a n c i s c o  i n c l u d e a dummy v a r i a b l e t o  i n d i c a t e t h e presence o r absence of a t e a c h i n g s t e i n weight t h e e q u a t i o n a c c o r d i n g programs o f f e r e d .  To  program.  C a r r and F e l d -  t o t h e a c t u a l number o f t e a c h i n g  In each case t h e r e  i s no j u s t i f i c a t i o n g i v e n  f o r the  method adopted n o r i s t h e r e any a n a l y s i s t h a t r e v e a l s t h e reason f o r c o s t increases.  I f teaching  i s c h a r a c t e r i z e d by h i g h f i x e d c o s t s , a dummy  v a r i a b l e i s p r o b a b l y adequate.  I f t h e d i v e r s i t y of t h e t e a c h i n g  program  31  (medical,  nursing,  etc.)  i s responsible  Feldstein's variable i s appropriate.  f o r i n c r e a s i n g c o s t s , Carr  However, c o s t s may  the number of students i n the program, and  and  be r e l a t e d to  f i x e d c o s t s may  be  low.  In  t h i s case n e i t h e r v a r i a b l e s u f f i c e s . Ingbar and previous  Taylor  researchers.  (1968) took a s l i g h t l y d i f f e r e n t approach to They d i d not  c a t e g o r i z e homogenous groups of  h o s p i t a l s on the b a s i s of a v a i l a b l e f a c i l i t i e s . standardize for  h o s p i t a l output a c c o r d i n g  the p a t i e n t .  the  Rather they attempted  to  to the number of s e r v i c e s performed  They developed an e x t e n s i v e  list  of v a r i a b l e s  (over  100)  from which e l e v e n major f a c t o r s or a c t i v i t i e s were d e r i v e d u s i n g p r i n c i p a l components a n a l y s i s .  These i n c l u d e  (iii)  (iv) laboratory a c t i v i t y ,  (vi)  l e n g t h of s t a y ,  surgical activity,  activity, services.  ( v i i ) maternity  ( i x ) ambulatory a c t i v i t y , The  (ii) utilization,  (v) r a d i o l o g y  activity,  activity,  (viii) pediatric  (x) p r i v a t e s e r v i c e s , ( x i ) ward  e f f e c t of these f a c t o r s on measures of u n i t c o s t were  tested using regression analysis. volume of the a c t i v i t y (vi)  ( i ) size-volume,  A s i n g l e v a r i a b l e , r e l a t e d to  the  (e.g., number of i n p a t i e n t weighted o p e r a t i o n s  s u r g i c a l a c t i v i t y ) was  chosen to r e p r e s e n t  each f a c t o r .  Two  for  hospital  c o s t e q u a t i o n s were e s t i m a t e d to e s t a b l i s h the r e l a t i o n s h i p between h o s p i t a l s i z e and  capacity.  Cost per a v a i l a b l e bed  day  and  cost  per  p a t i e n t day were the dependent v a r i a b l e s ; the eleven a c t i v i t y measures were the independent v a r i a b l e s . expectations.  They r e v e a l e d  w i t h a c o s t maximum at 150 economies were to be had tion.  beds!  i n v e r t e d U-shaped average c o s t This novel  discovery  at e i t h e r s m a l l s c a l e or v e r y  However, the c u r v e was  c o s t i n t h i s sense was  an  T h e i r r e s u l t s were d i f f e r e n t from  function,  suggested t h a t  with respect  cost  l a r g e s c a l e opera-  so smooth t h a t the authors concluded  v i r t u a l l y constant  their  to  size.  that  32  Cohen (1967) (1970) a l s o adopted a weighted s e r v i c e approach as h i s method of output s t a n d a r d i z a t i o n . of s e r v i c e s performed s e r v i c e ^ by as the  sum  (e.g., Ingbar and  i t s estimated average c o s t .  type and  quantity  1968), he weighted each  Cohen d e f i n e d  output of a h o s p i t a l  u n i t s of any  service  per-  hospital:  S, = k  W. l  where  Q.. xk  i s s e r v i c e output i n the k t h h o s p i t a l . W  i s the weight of the  Q^k  1 S  the  weight of the  quantity  of each s e r v i c e u n i t was  i t h service.  of the  i t h service  s e r v i c e u n i t ' s average c o s t by cost  Taylor,  of the p r o d u c t s of the weights and  formed i n t h a t  The  Instead of u s i n g  (VL)  i t h s e r v i c e i n the k t h h o s p i t a l . was  determined by d i v i d i n g  the average c o s t of a p a t i e n t determined by  s e r v i c e u n i t a c r o s s the 23 h o s p i t a l s  i n the  day.  summing t o t a l c o s t sample and  of  the Average  that  d i v i d i n g by  the  t o t a l number of s e r v i c e u n i t s . Cohen (1970) adds another f a c t o r to take account of d i f f e r e n c e s q u a l i t y of c a r e between h o s p i t a l s .  This  i s done i n two  steps:  in  first,  by  the a d d i t i o n of a dummy v a r i a b l e i n d i c a t i n g whether a h o s p i t a l i s e i t h e r a f f i l i a t e d or not  a f f i l i a t e d with a medical school;  second, by u s i n g  a  v a r i a b l e t h a t r e f l e c t s the degree of a f f i l i a t i o n w i t h the m e d i c a l  school,  i . e . an a f f i l i a t e d h o s p i t a l was  30  p e r c e n t "more c a r e "  classified  as p r o v i d i n g  10,  20 or  than a n o n - a f f i l i a t e d h o s p i t a l .  Cohen's r e s u l t s , u n l i k e  Ingbar and  Taylor,  revealed  the  existence  of economies of s c a l e w i t h the o p t i m a l s i z e d h o s p i t a l b e i n g somewhere i n the range of 560-790 beds depending on the q u a l i t y v a r i a b l e used. Several  c r i t i c i s m s have been made of the w e i g h t i n g methods used  both Ingbar and  Taylor  and  Cohen.  Berki  (1972, 93)  notes t h a t  Ingbar  by and  33,  T a y l o r ' s v a r i a b l e s were randomly s e l e c t e d , l a c k i n g a t h e o r e t i c a l framework.  Consequently the r e s u l t i n g a c t i v i t i e s or f a c t o r s do not  "independent a n a l y t i c meaning." c o s t per bed  day  Also  i n the f i n a l e q u a t i o n , they e s t i m a t e  as the dependent v a r i a b l e and  departmental expenses (e.g.,  have  s e r v i c e expenses or  r a d i o l o g i c a l a c t i v i t y ) as the  independent  v a r i a b l e s — i n e f f e c t they are " c o r r e l a t i n g d i f f e r e n t d e f i n i t i o n s of put"  ( B e r k i , 1972,  94).  Cohen's method of w e i g h t i n g by average c o s t s was Berki  (1972) and  P. F e l d s t e i n (1970).  independent v a r i a b l e s by t h e s e same c o s t s e q u a l l e d S t a t i s t i c a l l y he (1972, 37)  i s not  or  t h e i r average c o s t , then assumed t h a t the  sum  a u t o c o r r e l a t i o n between output  c o s t s but  d e s c r i b i n g them.  As  weighted  by c o s t and  from summing c o s t s a c r o s s  cost  felt  Berki  itself."  the aggregate average c o s t  a l l h o s p i t a l s i n the  sample.  e f f i c i e n c y d i f f e r e n c e s among h o s p i t a l s .  P. F e l d s t e i n (1970, 295) questioned the measures used f o r He  of  would expect a h i g h degree of  A l s o Cohen weighted these s e r v i c e u n i t s by  quality.  by  t o t a l h o s p i t a l c o s t s , or the dependent v a r i a b l e .  explaining  T h i s assumes t h e r e a r e no  also c r i t i c i s e d  Cohen weighted the s e r v i c e s  comments, " s t a t i s t i c a l l y one  f i g u r e derived  out-  that a f f i l i a t i o n with a medical school  estimating  i s "not  a  s u f f i c i e n t l y d i s c r i m i n a t i n g measure f o r a l l q u a l i t y d i f f e r e n c e s among l a r g e h o s p i t a l s i n an urban a r e a . " ' F i n a l l y b o t h Ingbar and criticised  f o r not  adequately adjusting  activities—inpatient, standardization  was  Taylor's  outpatient,  attempted by  radiology  and  Ingbar and  laboratory  Cohen's s t u d i e s can  be  f o r the range of h o s p i t a l  teaching,  i n c l u s i o n of a v a r i a b l e f o r o u t p a t i e n t for outpatient  study and  etc.  A partial  Taylor  v i s i t s but activity  and  r i g h t hand  Cohen w i t h  t h e r e was  no  the  account  i n the adjustment p r o c e s s .  34  In the  s t u d i e s mentioned to d a t e ,  methods of s t a n d a r d i z i n g output f o r s e r v i c e mix  g  h o s p i t a l output.  have used two  In both cases they  d i f f e r e n c e s among h o s p i t a l s .  c o n t r o l s f o r the range of f a c i l i t i e s and p i t a l and  researchers  The  standardize  f i r s t method  s e r v i c e s a v a i l a b l e at the  assumes s i m i l a r u t i l i z a t i o n p a t t e r n s across h o s p i t a l s  F e l d s t e i n (1967), B e r r y (1967, 1970,  1974), F r a n c i s c o  similar  (1970)].  hos-  [Carr  and  The  second  method c o n t r o l s f o r d i f f e r e n c e s i n the number of s e r v i c e s a c t u a l l y performed f o r the p a t i e n t  [Ingbar and  Taylor  (1968), Cohen (1967  Both groups of a u t h o r s assume t h a t the range of s e r v i c e s and  and  1970)].  facilities  a v a i l a b l e i s a r e a s o n a b l e proxy f o r the range of diagnoses t h a t a h o s p i t a l i s c a p a b l e of t r e a t i n g and for  h o s p i t a l product d i f f e r e n t i a t i o n .  to s t a n d a r d i z e the  i s an adequate means of  adjusting  However, a more d i r e c t approach i s  output i n terms of the p a t i e n t r a t h e r than i n terms of  s e r v i c e s a v a i l a b l e or s e r v i c e s r e c e i v e d .  approach, a c c o r d i n g between c a s e mix  to Lave and  measures and  attempt at s t a n d a r d i z i n g M.  therefore,  F e l d s t e i n (1965, 1967)  T h i s i s a l s o a more a c c u r a t e  Lave (1971) who  showed a low  correlation  measures of s e r v i c e c a p a b i l i t y .  output i n terms of the p a t i e n t was using  The  first  undertaken  by  s p e c i a l t y groupings.  9 Feldstein teaching general  classified  h o s p i t a l s for: the year 1960  the p a t i e n t s of 177  s u r g e r y , ear  of t o t a l cases and  nose and  throat,  used l i n e a r r e g r e s s i o n  per p a t i e n t week were e x p l a i n e d  27.5  as  a  a n a l y s i s to e s t i m a t e  by d i f f e r e n c e s i n c a s e mix.  d i f f e r e n c e s explained  other.  i n each of the c a t e g o r i e s  the e x t e n t to which i n t e r - h o s p i t a l v a r i a t i o n s i n c o s t s per  t h a t case mix  non-  o r t h o p a e d i c s u r g e r y , gynaecology, o b s t e t r i c s and  expressed the number of cases t r e a t e d  proportion  British  into e i g h t ^ 'specialty' categories:  medicine, p a e d i a t r i c s , general  t r a u m a t i c and He  (1967)  case and He  costs  found  p e r c e n t of the v a r i a t i o n s i n  35  o v e r a l l ward c o s t s per  case.  U s i n g t h i s method of s t a n d a r d i z a t i o n of output, F e l d s t e i n (1967) examined the r e l a t i o n s h i p between h o s p i t a l c o s t and that cost  i s unaffected  by  size.  t h i s apparent absence of any counteracting  factors:  incorporated  and  concluded  further hypothesized  i n f l u e n c e on s i z e may  be  the "pure s c a l e e f f e c t " and  i . e . , the number of beds When he  However he  s i z e and  that  the r e s u l t of  the  the cases t r e a t e d per bed  "case flow per  a c a s e f l o w v a r i a b l e i n t o the e q u a t i o n s  two effect",  year. estimating  2 l o n g run average c o s t , R  was  increased,  w i t h a minimum p o i n t at around 900 detected 310  and  and  beds.  a U-shaped c u r v e was  F e l d s t e i n concluded he  a s c a l e economies e f f e c t , w i t h the o p t i m a l 900  observed, had  s i z e somewhere between  beds depending on the e q u a t i o n s p e c i f i c a t i o n .  While F e l d s t e i n was  a b l e to e x p l a i n a s i g n i f i c a n t p r o p o r t i o n  i n t e r - h o s p i t a l c o s t d i f f e r e n c e s u s i n g h i s method of s t a n d a r d i z i n g h i s e i g h t s p e c i a l t i e s c a t e g o r i e s were s t i l l v e r y broad. w i t h i n these c a t e g o r i e s ,  of output,  Heterogeneity  e s p e c i a l l y the l a r g e r , more d i v e r s e ones such as  g e n e r a l m e d i c i n e , surgery,  must be  seen as a c r i t i c i s m of t h i s method of  grouping. F i n a l l y to complete t h i s review of h o s p i t a l c o s t s t u d i e s w i t h the q u e s t i o n (1970a and  1970b).  of economies of s c a l e we They e l i m i n a t e d  should  case mix  consider  or product mix  concerned  Lave and from  their  average c o s t f u n c t i o n , because they assumed t h a t " w h i l e the output d i f f e r s among h o s p i t a l s , i t i s constant time p e r i o d ) "  (Lave and  w i t h i n a h o s p i t a l (over a  Lave, 1970a, 380).  h o s p i t a l s have a constant  case mix  Lave  mix short  Thus they assumed a l l  i n the s h o r t  run.  Lave and Lave (1970a) a p p l i e d t h e i r t e c h n i q u e s to 74 P e n n s y l v a n i a h o s p i t a l s f o r the p e r i o d 1961-1967.  The  first  western analysis  was  36  a time s e r i e s a n a l y s i s e x p r e s s i n g u t i l i z a t i o n and  size.  The  average c o s t as a f u n c t i o n of time,  second was  a pooled  s e r i e s ) e s t i m a t e which took account of other h o s p i t a l ' s teaching values  remarkably s i m i l a r , and  Lave and  been s u c c e s s f u l i n accounting  exist  parameters such as  s t a t u s , l o c a t i o n (urban or r u r a l ) and  of s i z e , u t i l i z a t i o n and  hospital.  ( c r o s s s e c t i o n , time  They noted "our  cost.  The  initial  r e s u l t s of both methods were  Lave concluded t h a t t h e i r method  f o r the m u l t i - p r o d u c t  n a t u r e of  strong"  had  the  r e s u l t s i n d i c a t e t h a t i f economies of  i n the h o s p i t a l i n d u s t r y , they a r e not v e r y  1970a,  the  the  scale  (Lave and  Lave,  394). As  t h e r e was hospital. r e s t s are  t h i s d e s c r i p t i o n of the no As  'economies of s c a l e ' s t u d i e s  consensus on whether t h e r e e x i s t s an o p t i m a l  size for a  s t a t e d e a r l i e r the assumptions upon which the  inappropriate  ment among r e s e a r c h e r s  reveals,  analysis  to the h o s p i t a l i n d u s t r y , so t h i s l a c k of agreei s no  surprise.  economics p r o f e s s i o n of t h i s f a u l t  However, r e c o g n i t i o n by  i n t h e i r a n a l y s i s has not  the  been f o r t h -  c o m i n g — h e n c e the development of t h i s s u b s t a n t i a l body of l i t e r a t u r e w i t h misguided p o l i c y i m p l i c a t i o n s .  2.5.  Reimbursement Rapidly  Studies  r i s i n g h o s p i t a l c o s t s i n b o t h Canada and  the U n i t e d  i n the l a t e s i x t i e s l e d to r e c o g n i t i o n of the need f o r some attempt at h o s p i t a l c o s t containment.  were d i f f e r e n t from the long run average c o s t s .  systematic  T h i s gave r i s e to a second genera-  t i o n of h o s p i t a l c o s t s t u d i e s whose aim was procedures t h a t would be  States  to develop reimbursement  effective in controlling costs.  These s t u d i e s  'economies of s c a l e ' s t u d i e s which focused Instead  they were concerned w i t h s h o r t  run  on  37  average c o s t s . a critical  In a d d i t i o n case mix d i f f e r e n c e s among h o s p i t a l s became  i s s u e as h o s p i t a l c o s t s a r e c l e a r l y a f f e c t e d by the types of  p a t i e n t s they t r e a t .  Reimbursing  a g e n c i e s need t o be a b l e to s t a n d a r d i z e  f o r t h e s e v a r i a t i o n s i n output i f they a r e to gauge r e l a t i v e  efficiency  among h o s p i t a l s and a c h i e v e an e q u i t a b l e a l l o c a t i o n of r e s o u r c e s . A number of reimbursement schemes have been proposed, a l l of which have been reviewed i n c l u d e the group  from time t o time by a number of t a r g e t c e i l i n g approach,  departmental budget  authorsThey  i n d u s t r i a l engineering,  review and p r o s p e c t i v e reimbursement.  Experiments w i t h reimbursement schemes, p a r t i c u l a r l y reimbursement schemes, based on the group  target c e i l i n g  i n d u s t r i a l e n g i n e e r i n g and departmental budget taken i n the U n i t e d S t a t e s .  incentive  approach,  review, have been  under-  These a r e d e s c r i b e d here to a l l o w examination  of the methods used to account f o r case mix d i f f e r e n c e s among h o s p i t a l s . 2.5.1.  Group Target C e i l i n g  Approach  The e a r l i e s t attempts a t i n c e n t i v e reimbursement, u s i n g the group  t a r g e t c e i l i n g approach, were undertaken by Blue Cross of  Western P e n n s y l v a n i a i n 1966.  Nine groups of h o s p i t a l s w e r e e s t a b l i s h e d  based on the h o s p i t a l ' s l o c a t i o n  ( m e t r o p o l i t a n , urban, r u r a l ) and  extent of i t s t e a c h i n g program (advanced teaching) .  H o s p i t a l s were reimbursed  t e a c h i n g , t e a c h i n g and  the  non-  r e t r o s p e c t i v e l y on the b a s i s of  i n c u r r e d c o s t s , but i f a h o s p i t a l ' s average c o s t per p a t i e n t day was i t s group's c e i l i n g  above  (10 p e r c e n t above the average c o s t per p a t i e n t day f o r  the group), the h o s p i t a l would only be reimbursed a t the c e i l i n g  rate.  T h i s method of reimbursement assumes t h a t h o s p i t a l s w i t h i n each group  had  an homogenous output, measured on the b a s i s o f l o c a t i o n and t e a c h i n g programs.  The c o m p l e x i t y of a h o s p i t a l ' s case l o a d was  not c o n s i d e r e d .  38  Thus the reimbursement scheme p e n a l i z e s or p l a c e s under u n f a i r p r e s s u r e the a d m i n i s t r a t o r whose h o s p i t a l ' s case mix becomes more e x p e n s i v e . S i m i l a r l y the h o s p i t a l whose case mix becomes l e s s expensive i s rewarded, f o r reasons u n r e l a t e d to t h e r e l a t i v e e f f i c i e n c y of the h o s p i t a l Lave and  S i l v e r m a n , 1973,  84).  Shuman, Wolfe arid Hardwick (1972) attempted approach by b u i l d i n g a case mix scheme.  (Lave,  to improve  f a c t o r i n t o the proposed  on  this  reimbursement  However, l a c k of d a t a meant they had t o r e s o r t to measuring  mix as a f u n c t i o n o f m e d i c a l s t a f f a t t r i b u t e s .  They i n c l u d e d t h i s  case  variable  i n a model w i t h i n d i c e s r e p r e s e n t i n g s e r v i c e s , e d u c a t i o n , l o c a t i o n , p a t i e n t a c t i v i t y and s i z e c l a s s e s .  Each h o s p i t a l was  classified  out-  indi-  v i d u a l l y a c c o r d i n g to the e f f e c t o f these f a c t o r s on t o t a l c o s t .  Future  c o s t s were p r e d i c t e d and c o n t r o l bands e s t a b l i s h e d which were used to determine  i n c e n t i v e s , p e n a l t i e s and maximum reimbursement to the p r o v i d e r s .  A l t h o u g h t h i s method was  a slight  improvement over the a r b i t r a r y  c a t i o n of the Western P e n n s y l v a n i a scheme where t e a c h i n g and determined  location  the h o s p i t a l c l a s s and hence the r a t e , m e d i c a l s t a f f  i s s t i l l an i n d i r e c t measure o f case mix and, 2.5.2.  classifi-  attributes  t h e r e f o r e , a poor s u r r o g a t e .  I n d u s t r i a l Engineering Another approach  t o i n c e n t i v e reimbursement i s based  on  12 i n d u s t r i a l engineering techniques.  These t e c h n i q u e s aim a t improving  the e f f i c i e n c y o f h o s p i t a l a c t i v i t i e s by r e d u c i n g l a b o u r r e q u i r e m e n t s , maximizing  l a b o u r performance,  i n c r e a s i n g output per u n i t of l a b o u r ,  r e d u c i n g the use of m a t e r i a l s or s u p p l i e s .  I n c e n t i v e s a r e p a i d t o the  h o s p i t a l s on the b a s i s of s a v i n g s r e s u l t i n g from the i n t r o d u c t i o n of these e f f i c i e n c y programs. of h o s p i t a l i n p u t s and  T h i s approach  f o c u s e s on the e f f i c i e n t  combination  i s not concerned w i t h h o s p i t a l o u t p u t s .  It relies  39  on d e t a i l e d time and motion s t u d i e s  i n each department o f each h o s p i t a l .  Rewards a r e made on t h e b a s i s o f improved e f f i c i e n c y w i t h i n  hospitals—  t h e r e a r e no comparisons o f r e l a t i v e e f f i c i e n c y between h o s p i t a l s — s o a r e l a t i v e l y i n e f f i c i e n t h o s p i t a l stands t o make l a r g e s a v i n g s and i s rewarded w h i l e a r e l a t i v e l y e f f i c i e n t h o s p i t a l stands t o g a i n v e r y 2.5.3.  little.  Departmental Budget Review Departmental budget review was used by the C o n n e c t i c u t 13  H o s p i t a l A s s o c i a t i o n and SSA i n a program of i n c e n t i v e reimbursement. Target budgets were s e t f o r i n d i v i d u a l h o s p i t a l departments by a committee comprising representatives i n the state.  from e q u i v a l e n t  departments i n o t h e r h o s p i t a l s  T h i s was a form o f peer review w i t h t h e u n d e r s t a n d i n g  members o f s i m i l a r departments c o u l d  set r e a l i s t i c  t a r g e t s f o r each  At t h e end o f t h e y e a r , t h e h o s p i t a l ' s a c t u a l c o s t s were reviewed i t s target.  that other.  against  C o n n e c t i c u t Blue Cross and SSA had agreed i n advance t o pay  the h i g h e r c o s t s — e i t h e r t h e a c t u a l departmental c o s t s o r t h e t a r g e t e d costs.  As a consequence t h e h o s p i t a l had n o t h i n g t o l o s e , but i t d i d  have an i n c e n t i v e t o o p e r a t e below i t s t a r g e t . Again s t a n d a r d i z a t i o n  o f f i n a l h o s p i t a l output was n o t c o n s i d e r e d .  T a r g e t s were s e t f o r i n t e r m e d i a t e  services, not f i n a l s e r v i c e s .  Case mix  i n a h o s p i t a l was assumed c o n s t a n t , so t h e r e a l i n c e n t i v e f o r t h e h o s p i t a l was they  n o t t o become more e f f i c i e n t but t o reduce t h e number o f complex cases treated. These e a r l y i n c e n t i v e reimbursement schemes were n o t s u c c e s s f u l i n  containing first, not  hospital costs.  There were t h r e e main reasons f o r t h i s :  payment t o t h e h o s p i t a l s was made r e t r o s p e c t i v e l y and the onus was  on t h e h o s p i t a l t o keep w i t h i n  i t s targeted  budget because the  r e i m b u r s i n g agency u s u a l l y p a i d e i t h e r the a c t u a l c o s t s i n c u r r e d by t h e  40  h o s p i t a l or the t a r g e t e d  c o s t s , whichever were the h i g h e s t .  Second,  i n c e n t i v e s f o r the h o s p i t a l to o p e r a t e below i t s expected c o s t s — i t  the was  a l l o w e d to r e t a i n the d i f f e r e n c e between the a c t u a l and  the  c o s t s — d i d not  surpluses, i f  have c o s t containment i m p l i c a t i o n s .  The  expected  14 any,  were spent on  increase operating  expanding s e r v i c e s and  costs.  More fundamental was  i n c e n t i v e s t r u c t u r e which was  inappropriate  In the absence of a p r o f i t motive and was  l i t t l e point  a systematic  f a c i l i t i e s , which, i n t u r n , the n a t u r e of  the  to the h o s p i t a l i n d u s t r y .  cost minimizing behaviour,  in offering traditional incentives.  T h i r d , the l a c k of  comparison of h o s p i t a l performance (with no  of s t a n d a r d i z i n g h o s p i t a l output) meant t h a t i t was r e l a t i v e e f f i c i e n c y among h o s p i t a l s and  there  accurate  impossible  method  to measure  to set budgets which r e f l e c t e d  the case c o m p l e x i t y of the h o s p i t a l . 2.5.4.  Prospective  Reimbursement  Under p r o s p e c t i v e  reimbursement, h o s p i t a l budgets a r e  i n advance f o r the year i n the form of a b l o c k budget or on the of a per day  or per  case r a t e and  t h e s e predetermined l i m i t s .  h o s p i t a l s are r e q u i r e d  set  basis  to stay  within  U n l i k e r e t r o s p e c t i v e reimbursement, p r o -  s p e c t i v e reimbursement s h i f t s some of the r i s k of c o s t onto the h o s p i t a l s by m o t i v a t i n g  them to be more c o s t c o n s c i o u s ,  future expenditures. and  q u a l i t y of t h e i r  budget and  to a n t i c i p a t e and  justify  Moreover they are m o t i v a t e d t o monitor the s e r v i c e s to ensure they a r e keeping w i t h i n  to keep c o s t s down to a v o i d  l o s s e s or to a c h i e v e  quantity their  surpluses  (Dowling, 1974). Unlike  some of the r e t r o s p e c t i v e reimbursement schemes  e a r l i e r , prospective  described  reimbursement does have the p o t e n t i a l f o r rewarding  the r e l a t i v e l y e f f i c i e n t h o s p i t a l s and  p e n a l i z i n g the  inefficient  ones.  41  However, the e f f e c t i v e n e s s of t h i s approach depends l a r g e l y on the of the r e i m b u r s i n g  ability  agency to i d e n t i f y the r e l a t i v e l y e f f i c i e n t v i s - a - v i s  i n e f f i c i e n t h o s p i t a l s and  set r e a l i s t i c budgets or r a t e s f o r the h o s p i t a l s .  Success depends upon m e a n i n g f u l i n t e r - h o s p i t a l c o s t comparisons which o n l y be achieved  by a c c u r a t e  can  s t a n d a r d i z a t i o n f o r product d i f f e r e n c e s .  Canada experimented v e r y b r i e f l y w i t h i n c e n t i v e reimbursement schemes and  prospective  b u d g e t i n g has  been the predominant form of  h o s p i t a l reimbursement s i n c e the l a t e f i f t i e s .  However, o n l y  recently,  w i t h a change i n the f e d e r a l - p r o v i n c i a l c o s t s h a r i n g agreement has  (1977),  the major p a r t of the h o s p i t a l f i n a n c i n g burden been p l a c e d  p r o v i n c i a l government.  hospitals.  ( i ) they are e q u i t a b l e  to h o s p i t a l s and  They r e a l i z e t h a t the  t h a t they a r e seeking  the  T h i s i s f o r c i n g them to review t h e i r budget  s e t t i n g procedures to ensure t h a t t i o n of r e s o u r c e s  on  depend on  in their  ( i i ) they encourage e f f i c i e n c y  allocawithin  improvements i n , b u d g e t a r y p r a c t i c e s  f i n d i n g an a c c u r a t e  way  of  standardizing  f o r d i f f e r e n c e s i n h o s p i t a l output. In the U n i t e d  States reimbursing  reimbursement as the l a t e s t and controlling hospital costs.  a g e n c i e s a r e l o o k i n g to  p o t e n t i a l l y most e f f e c t i v e means of  However they a l s o r e a l i z e t h a t the p o t e n t i a l  success of t h i s approach r e s t s on s o l v i n g the output problem so t h a t a c c u r a t e  standardization  comparisons of h o s p i t a l performance can be made.  Consequently t h e r e has  been a c o n c e n t r a t i o n  of a c t i v i t y aimed at  developing  these methods of s t a n d a r d i z a t i o n of output f o r use  bursement.  Most of the work undertaken f o r t h i s purpose has  standardization taken i n the  prospective  i n terms of case mix  r a t h e r than s e r v i c e mix  'economies of s c a l e ' s t u d i e s ) .  i n reimfocused  on  (the approach  42  2.6.  S t a n d a r d i z a t i o n o f Output i n Terms o f Case Mix 2.6.1.  S p e c i a l t y Mix ( F e l d s t e i n , Feldstein  h o s p i t a l output He c l a s s i f i e d had  1967)  (1965 and 1 9 6 7 ) ^ was t h e f i r s t  to standardize  i n terms of the types of cases t r e a t e d by t h e h o s p i t a l . p a t i e n t s a c c o r d i n g t o ' s p e c i a l t y ' mix but t h i s approach  the problem o f h e t e r o g e n e i t y w i t h i n t h e l a r g e r s p e c i a l t y c a t e g o r i e s  such as g e n e r a l medicine  and s u r g e r y .  Development of t h e I n t e r n a t i o n a l C l a s s i f i c a t i o n o f D i s e a s e s  Adapted  (ICDA) p r o v i d e d t h e base f o r a much more d e t a i l e d c l a s s i f i c a t i o n o f patients according to diagnosis.  I t enabled  case mix t o be d e f i n e d  d i r e c t l y which seemed i n t u i t i v e l y t o be a b e t t e r approach than  definition  on the b a s i s o f s u r r o g a t e s such as t h e number o f f a c i l i t i e s and s e r v i c e s . Lave and Lave (1971) p r o v i d e d e m p i r i c a l support they found  that i n s t i t u t i o n a l c h a r a c t e r i s t i c s  f o r t h i s approach when  ( s i z e , teaching status,  number of advanced s e r v i c e s ) e x p l a i n e d o n l y about 25 p e r c e n t o f v a r i a t i o n i n case mix d e f i n e d i n terms o f d i a g n o s i s . 2.6.2.  Diagnostic Proportions  16  (Evans,  1971)  Evans (1971) grouped t h e d i s c h a r g e diagnoses  of a l l p a t i e n t s  i n 185 a c u t e h o s p i t a l s i n O n t a r i o i n 1967 i n t o 41 r o u g h l y homogenous ICDA c a t e g o r i e s and t h e age-sex d a t a f o r the same p a t i e n t s were grouped 40 c a t e g o r i e s .  into  The p r o p o r t i o n o f p a t i e n t s and p a t i e n t days i n each of  t h e s e c a t e g o r i e s were c a l c u l a t e d f o r a l l h o s p i t a l s .  Then v a r i a b l e s ,  t o g e t h e r w i t h s c a l e and a c t i v i t y v a r i a b l e s , represented, t h e independent v a r i a b l e s o f two r e g r e s s i o n e q u a t i o n s :  one w i t h average i n p a t i e n t  per i n p a t i e n t day (DAYEX) as t h e dependent v a r i a b l e , t h e o t h e r average c o s t per case  (CASEX) as t h e dependent v a r i a b l e .  expense  with  The r e s u l t s  43  showed t h a t d i a g n o s t i c mix  " ' e x p l a i n e d ' about 80 p e r c e n t of the  inter-  h o s p i t a l v a r i a n c e i n c o s t per case and about 50 p e r c e n t of the v a r i a n c e i n c o s t per day"  (Evans, 1971,  202).  However, c o l l i n e a r i t y among the  d i a g n o s t i c and age-sex p r o p o r t i o n s suggested t o aggregate  these c a t e g o r i e s .  F a c t o r a n a l y s i s was  d i a g n o s t i c p r o p o r t i o n s were reduced reduced  t o 6.  some attempt  to 10;  should be made  used and  the  41  the 40 age-sex c a t e g o r i e s were  These f a c t o r s were i n c l u d e d i n the r e g r e s s i o n equations  w i t h the o t h e r independent  v a r i a b l e s and were shown to account  for  "85 p e r c e n t of i n t e r - h o s p i t a l v a r i a n c e i n c o s t per c a s e " (Evans, 1971, Evans c o n t r a s t s t h i s t o M. f o r U.K. and  F e l d s t e i n ' s (1967) f i n d i n g of 27.5  206).  percent  d a t a , a r g u i n g t h a t the f i n e n e s s of d e t a i l of the d i a g n o s t i c data  the age-sex p r o p o r t i o n s enhanced h i s r e s u l t .  d i a g n o s t i c mix  He concludes  of a h o s p i t a l ' s i n p a t i e n t l o a d i s a c r i t i c a l  t h a t the  determinant  of h o s p i t a l i n p a t i e n t c o s t s . Other  i n v e s t i g a t o r s have subsequently  u s i n g ICDA groupings and components a n a l y s i s ) . F e l d s t e i n and  factor analysis  standardized h o s p i t a l  (or more p r e c i s e l y ,  They a r e Lave, Lave and  S h u t t i n g a (1977), Z a r e t s k e y  Silverman  output  principal  (1972, 1973),  (1977), Goodisman and  Trompeter  (1979). Lave, Lave and  Silverman  (1972) take the 17 broad  ICDA codes and  compare t h r e e p o s s i b l e ways t o d e a l w i t h the c o l l i n e a r i t y problems i n h e r e n t i n these g r o u p i n g s . analysis,  (iii)  They a r e ( i ) f a c t o r a n a l y s i s ,  the r e d u c t i o n of e x p l a n a t o r y v a r i a b l e s by  v a r i a b l e s with s i m i l a r estimated marginal c o s t s . method of a g g r e g a t i o n was  ( i i ) cluster  aggregating  They found the  s u p e r i o r t o the other two  third  i n t h a t i t was  r e s p o n s i b l e f o r e x p l a i n i n g a g r e a t e r p r o p o r t i o n of v a r i a t i o n i n a c t u a l 17 costs.  F e l d s t e i n and  S h u t t i n g a (1977) began w i t h 152  d i a g n o s t i c groups,  44  51 s u r g i c a l groups and 10 age-sex groups. a n a l y s i s t o aggregate t h i s i n f o r m a t i o n 10 s u r g i c a l components. categories  They used p r i n c i p a l components  i n t o 10 d i a g n o s i s  S i m i l a r l y Zaretsky  components and  (1977) reduces 45 d i a g n o s t i c  t o 12 f a c t o r s and Goodisman and Trompeter (1979) reduced 44  primary d i a g n o s t i c c a t e g o r i e s 2.6.3.  Diagnostic  t o 13 f a c t o r s .  Proportions  and A d d i t i o n a l Case Mix Measures  (Lave and Lave, 1972, 1973) Lave and Lave (1972, 1973) and F e l d s t e i n and S h u t t i n g a (1977) i n c l u d e other measures o f case mix, i n a d d i t i o n t o d i a g n o s t i c f a c t o r v a r i a b l e s , i n t h e i r r e g r e s s i o n equations developed t o e x p l a i n variations i n hospital costs. one  F e l d s t e i n and S h u t t i n g a  (1977) i n c l u d e  o t h e r m e a s u r e — t h e p r o p o r t i o n o f p a t i e n t s r e c e i v i n g 51 s u r g i c a l p r o -  cedures ( l a t e r reduced t o 10 f a c t o r s ) . i n c l u d e a v a r i e t y of o t h e r of surgery disease  Lave and Lave (1972, 1973)  case mix measures:  a measure of the i n c i d e n c e  ( f r a c t i o n of p a t i e n t s who have s u r g e r y ) ;  "commonality"—the proportion  two measures o f  of p a t i e n t s w i t h a common  (must occur i n a t l e a s t 0.5% o f a l l p a t i e n t s ) , t h e p r o p o r t i o n s u r g i c a l p a t i e n t s w i t h a common d i a g n o s i s ;  K. 20 (easy  surgery),  index 5*70 (hard  of p a t i e n t s w i t h s u r g i c a l index  the proportion  o f non-  two measures o f s u r g i c a l  c o m p l e x i t y based on the Blue S h i e l d index o f r e l a t i v e v a l u e s procedures—the proportion  diagnosis  for surgical  difficulty  of patients with s u r g i c a l d i f f i c u l t y  surgery).  They h y p o t h e s i z e d t h a t h o s p i t a l s w i t h a h i g h p r o p o r t i o n p a t i e n t s would have h i g h e r  of s u r g i c a l  c o s t s ; h o s p i t a l s w i t h a h i g h p r o p o r t i o n of  p a t i e n t s w i t h "common" diagnoses would have lower c o s t s ; and h o s p i t a l s w i t h more complex surgery  would have h i g h e r  were confirmed i n the r e g r e s s i o n a n a l y s i s .  costs.  A l l these hypotheses  T h e i r approach and t h e i r  45  r e s u l t s supported  t h e i r argument t h a t t h e r e a r e many dimensions  case mix measure and t h a t a s i n g l e measure based  t o the  on d i a g n o s i s does not  necessarily reveal this. 2.6.4.  I n f o r m a t i o n Theory  (Evans and Walker, 1972)  Evans and Walker (1972) took an i n n o v a t i v e step i n t h e i r study o f 97 B r i t i s h Columbia h o s p i t a l s f o r the year 1967. the d i a g n o s t i c breakdown which had been used 41 c a t e g o r i e s to 98 c a t e g o r i e s .  i n Ontario  They a l s o proposed  They i n c r e a s e d  (Evans, 1971) from  an a l t e r n a t i v e measure  f o r a d j u s t i n g f o r case mix v a r i a t i o n which i s an i n f o r m a t i o n measure based on the d i a g n o s t i c p r o p o r t i o n s . to be handled  They h y p o t h e s i z e d " t h a t complex cases  tend  i n a few h o s p i t a l s w i t h more e x t e n s i v e f a c i l i t i e s and more  s p e c i a l i z e d s t a f f , w h i l e r e l a t i v e l y s t r a i g h t f o r w a r d cases tend t o be d i s t r i b u t e d more e v e n l y over the h o s p i t a l system" (Evans and Walker, 1977, 399).  Thus a measure o f the degree o f c o n c e n t r a t i o n o f a case type i s a  measure of i t s c o m p l e x i t y . p r o v i d e d by the expected An  T h i s measure o f degree o f c o n c e n t r a t i o n was  i n f o r m a t i o n measure developed  by T h e i l  (1967).  index o f the r e l a t i v e complexity o f the h o s p i t a l s ' c a s e l o a d was  d e r i v e d by f i r s t  d e v e l o p i n g a s e t o f d i a g n o s t i c complexity v a l u e s f o r  the 98 d i a g n o s t i c c a t e g o r i e s .  D i a g n o s t i c c a t e g o r i e s which were concen-  t r a t e d i n t o a few h o s p i t a l s were accorded which were d i s t r i b u t e d The average  the h i g h e s t v a l u e s ;  i n many h o s p i t a l s were accorded  v a l u e was 1.  diagnoses  the lowest v a l u e s .  The p r o p o r t i o n o f cases i n each d i a g n o s t i c  c a t e g o r y was then determined  f o r each h o s p i t a l , m u l t i p l i e d by i t s r e l a t i v e  weight and summed t o g i v e an index f o r each h o s p i t a l which r e p r e s e n t e d 18 the r e l a t i v e complexity o f i t s c a s e l o a d . complexity were d e r i v e d :  Two measures o f h o s p i t a l  CMPXC1 i n d i c a t e s the r e l a t i v e complexity o f  the h o s p i t a l ' s c a s e l o a d ; CMPXC2 i n d i c a t e s the r e l a t i v e complexity o f a  46  h o s p i t a l ' s c a s e l o a d a f t e r account in hospital  has a l r e a d y been taken of d i f f e r e n c e s  size.  Evans and Walker i n c l u d e d one of t h e i r a l t e r n a t i v e measures of mix  case  i n a number of r e g r e s s i o n e q u a t i o n s a l o n g w i t h a number of other  independent  variables  (number of r a t e d beds, average  l e n g t h of s t a y ,  occupancy r a t e , d i r e c t e d u c a t i o n a l expenses, o u t p a t i e n t expense, departmental expense ( d e p r e c i a t i o n , r e n t a l and c a p i t a l i n p u t ) , the presence  non-  i n t e r e s t charges, i . e .  or absence of a n u r s i n g s c h o o l or m e d i c a l 19  school a f f i l i a t i o n ,  one of t h r e e measures of s p e c i a l i a t i o n  dependent v a r i a b l e s were c o s t per case i n p a t i e n t day  (DAYEX).  (CASEX) and  ).  The  i n p a t i e n t expense per  They d i s c o v e r e d t h a t the c o m p l e x i t y  variable  CMPXC1 e x p l a i n e d n e a r l y as much of i n t e r - h o s p i t a l c o s t v a r i a t i o n as d i d the p r e v i o u s e l e v e n d i a g n o s t i c f a c t o r s c o r e s used  i n the Evans 1971  T h i s i n d i c a t e s the s u p e r i o r i t y of t h i s s i n g l e measure over the s c o r e approach because i t reduces s i o n e q u a t i o n used without  factor  the number of v a r i a b l e s i n the r e g r e s -  t o e s t i m a t e average  c o s t s per case and per  a s u b s t a n t i a l l o s s of e x p l a n a t o r y power.  measure of case mix  study.  day,  I t i s a l s o a more d i r e c t  because i t c a p t u r e s the i n f o r m a t i o n i n the d i a g n o s i s  m a t r i x d i r e c t l y and a v o i d s the a r b i t r a r y a g g r e g a t i o n of d i a g n o s i s c a t e g o r i e s through  f a c t o r a n a l y s i s n e c e s s a r y t o reduce  c o l l i n e a r i t y among  the o r i g i n a l 41 d i a g n o s t i c c a t e g o r i e s . Horn and  Schumacher (1979) draw the r e a d e r ' s a t t e n t i o n t o c e r t a i n  diagnoses which do not f i t the assumption  that a concentrated diagnosis  i s complex, e.g. m y o c a r d i a l i n f a r c t i o n , emergencies. and w i d e l y d i s t r i b u t e d , but v e r y complex.  be common  S i m i l a r l y , they c l a i m t h e r e  a r e a number of c o n d i t i o n s t h a t have low c l i n i c a l r a t e and a r e h i g h l y c o n c e n t r a t e d , e.g.,  These may  complexity/low  death  conditions associated with  limited  47.  facilities,  r a r e c o n d i t i o n s , i n a p p r o p r i a t e a d m i s s i o n s , or i n a p p r o p r i a t e  c o d i n g or g r o u p i n g .  However, by d e f i n i t i o n , these anomalies  have a v e r y s i g n i f i c a n e f f e c t because  c o u l d not  t h e i r r e l a t i v e l y s m a l l numbers i n  r e l a t i o n to the t o t a l c a s e l o a d s h o u l d minimize  the e f f e c t on the h o s p i t a l ' s  o v e r a l l complexity value. 2.6.5.  Other A p p l i c a t i o n s of the I n f o r m a t i o n Theory Measure i n Canada Barer  (1977) used i n f o r m a t i o n theory to s t a n d a r d i z e f o r case  mix d i f f e r e n c e s between h o s p i t a l s i n B r i t i s h Columbia. h i s study was  of  to develop and t e s t e m p i r i c a l l y a m e t h o d o l o g i c a l b a s i s f o r  d e t e r m i n i n g m a r g i n a l h o s p i t a l case c o s t s . u s i n g B.C.  The purpose  He d e r i v e d these case c o s t s  h o s p i t a l d a t a and used them to compare the h o s p i t a l e x p e n d i t u r e  i m p l i c a t i o n s f o r a number of a l t e r n a t i v e forms of primary c a r e .  He  t h a t community h e a l t h c l i n i c s and p h y s i c i a n group p r a c t i c e s had  the  p o t e n t i a l f o r r e d u c i n g h o s p i t a l e x p e n d i t u r e s through reduced  found  admission  patterns. The major a n a l y t i c a l p o r t i o n of the work i n v o l v e d the  specification,  e s t i m a t i o n and a p p l i c a t i o n o f b e h a v i o u r a l average c o s t e q u a t i o n s .  The  e q u a t i o n s were e s t i m a t e d from a time s e r i e s , c r o s s - s e c t i o n a l a n a l y s i s of 87 B.C.  h o s p i t a l s over an e i g h t year p e r i o d  theory was  (1966-1973).  Information  used to o b t a i n case c o m p l e x i t y v a r i a b l e s to s t a n d a r d i z e f o r  case mix v a r i a t i o n among h o s p i t a l s .  B a r e r ' s time s e r i e s a n a l y s i s r e v e a l e d  the s t a b i l i t y o f these case mix weights D e s p i t e Evans and Walker's  over time.  (1972) and more r e c e n t l y B a r e r ' s (1977)  success i n u s i n g the i n f o r m a t i o n measure of case mix  complexity to e x p l a i n  i n t e r - h o s p i t a l c o s t d i f f e r e n c e s i n O n t a r i o and B r i t i s h Columbia,  i t has not  been a p p l i e d to the h o s p i t a l budget review system i n e i t h e r of these p r o v i n c e s .  48  However, i t i s b e i n g used  i n Quebec as p a r t of t h e i r t h r e e - s t a g e p r o c e s s  of c l a s s i f y i n g h o s p i t a l s f o r budgetary Lance, C o n t a n d r i o p o u l o s , p r o c e s s which was  developed  f i n a n c i n g methods founded  Thuy Nguyen (1979, 2) d e s c r i b e t h i s  to " c o r r e c t the i n e q u i t i e s c r e a t e d by  on h i s t o r i c a l d a t a . "  g l o b a l budget system i n 1972 the b a s i s of 1970  purposes.  the  Quebec had adopted  a  i n which h o s p i t a l s were a l l o c a t e d budgets on  e x p e n d i t u r e s , w i t h an i n c r e a s e f o r p r i c e i n c r e a s e s .  As t h i s base r e p r e s e n t e d a c t u a l c o s t s i n 1970  w i t h no account  taken f o r  the r e l a t i v e e f f i c i e n c y or i n e f f i c i e n c y of the i n d i v i d u a l h o s p i t a l s , r e s u l t was  t h a t some h o s p i t a l s were r e l a t i v e l y o v e r - f i n a n c e d and  were r e l a t i v e l y u n d e r - f i n a n c e d . was  developed The  to c o r r e c t t h i s  first  The  the  others  review p r o c e s s of budgetary  bases  situation.  step i n t h i s p r o c e s s i n v o l v e s the f o r m a t i o n of homogenous  groups of h o s p i t a l s , measured i n terms of the s i m i l a r i t y of t h e i r  output.  The h o s p i t a l s a r e grouped u s i n g an index of s i m i l a r i t y d e r i v e d from a p p l i c a t i o n of i n f o r m a t i o n t h e o r y .  the  The number of p a t i e n t days f o r each  of the 98 d i a g n o s t i c c a t e g o r i e s (ICDA8) are computed as a p r o p o r t i o n of t o t a l p a t i e n t days f o r each i n d i v i d u a l h o s p i t a l .  The d i s t r i b u t i o n of  p a t i e n t days a c r o s s a l l Quebec h o s p i t a l s i s c a l c u l a t e d f o r these same 98 diagnostic categories.  A measure i s determined  f o r each h o s p i t a l , u s i n g  i n f o r m a t i o n t h e o r y , which q u a n t i f i e s the e x t e n t t o which the  individual  h o s p i t a l ' s d i s t r i b u t i o n of p a t i e n t days d i f f e r s r e l a t i v e l y from g e n e r a l d i s t r i b u t i o n f o r a l l Quebec h o s p i t a l s .  An index of  the  similarity,  which i s an e x t e n s i o n of the i n f o r m a t i o n measure, compares the  distribu-  t i o n between two h o s p i t a l s , measuring the d i f f e r e n c e between them, and l o s s of i n f o r m a t i o n r e s u l t i n g from t h e i r f u s i o n .  The  two most  similar  the  49  h o s p i t a l s are combined and t h i s p r o c e s s i s c o n t i n u e d u n t i l the d e s i r e d number of groups i s reached.  The d e c i s i o n t o stop the grouping  process  i s u s u a l l y made on a r b i t r a r y grounds but i s guided by the l o s s of mation  a t each s t a g e .  infor-  V a r i o u s s t a t i s t i c a l t e s t s can be a p p l i e d to the  groups t o t e s t the w i t h i n - g r o u p and between-group h e t e r o g e n e i t y C o n t a n d r i o p o u l o s , Thuy Nguyen, 1979,  (Lance,  11-13) and thereby d e r i v e the most  d i s t i n c t i v e and the most homogenous groups. A second measure i s a l s o used to group h o s p i t a l s — t h e E u c l i d e a n d i s t a n c e index.  T h i s i s used when o t h e r output v a r i a b l e s  ( r e l a t e d to  t e a c h i n g , r e s e a r c h , o u t p a t i e n t c a r e and o t h e r environmental f a c t o r s ) a r e included to c h a r a c t e r i z e h o s p i t a l s , ( d e f i n e d i n terms o f ICDA).  The  i n a d d i t i o n to the d i a g n o s i s v a r i a b l e s  index o f s i m i l a r i t y based on i n f o r m a t i o n  t h e o r y i s no l o n g e r a p p l i c a b l e because of the d i v e r s i t y o f v a r i a b l e s involved.  These output v a r i a b l e s a r e p r e s e n t e d i n T a b l e 2.2.  of d i a g n o s t i c c a t e g o r i e s has been reduced  The number  from 98 t o 18 to save on com-  p u t e r time and memory space. Lance et a l . f e l t  the " d i a g n o s i s " v a r i a b l e  days by 18 ICDA codes) was and  i t was  the "most r e p r e s e n t a t i v e of h o s p i t a l  g i v e n an a r b i t r a r y weight  an equal weight  ( d i s t r i b u t i o n of p a t i e n t  of 0.50;  of .041667 (0.50-r 12).  computed i n o r d e r t o determine  output"  the o t h e r 12 v a r i a b l e s  share  E u c l i d e a n d i s t a n c e i n d i c e s were  the o p t i m a l grouping of h o s p i t a l s , i . e .  t h a t grouping of h o s p i t a l s which maximizes the between-group d i s t a n c e and minimizes  the  within-group  distance.  Of the 142  acute c a r e h o s p i t a l s  i n Quebec, 18 s p e c i a l h o s p i t a l s were excluded from the a n a l y s i s and remaining 124 2 i n d i c e s of  h o s p i t a l s were grouped similarity.  the  i n t o 8 groups on the b a s i s of the  T a b l e 2.2.  1.  Quebec Approach - L i s t and Source o f Output V a r i a b l e s (Lance, C o n t a n d r i o p o u l a s , Thuy Nguyen,  V a r i a b l e s r e l a t e d to the TREATMENT OF INPATIENTS - D i s t r i b u t i o n of p a t i e n t - d a y s by d i a g n o s i s (ICDA, 8th, t w o - d i g i t c l a s s i f i c a t i o n ) . - Average l e n g t h of s t a y . - Number of p h y s i c i a n s by s p e c i a l t y . ^ - general practioners - surgical specialists - medical s p e c i a l i s t s - laboratory s p e c i a l i s t s - radiological specialists - D i s t r i b u t i o n of medical s e r v i c e s . ^ - hospital v i s i t s - external c l i n i c s v i s i t s - consultations - d i a g n o s t i c and t h e r a p e u t i c procedures - s u r g i c a l procedures r- other procedures - Age-sex d i s t r i b u t i o n of i n p a t i e n t s . ^ - male, newborn - male, l e s s than 1 year o l d - male, from 1 to 14 years o l d - male, from 15 to 44 years o l d - male, from 45 to 64 years o l d - male, from 65 years o l d and over - female, newborn - female, l e s s than 1 year o l d - female, from 1 to 14 years o l d - female, from 15 to 44 years o l d - female, from 45 to 64 years o l d - female, from 65 years o l d and over  II.  1979  V a r i a b l e r e l a t e d to the TREATMENT OF OUTPATIENTS - Cost o f m e d i c a l s e r v i c e s i n e x t e r n a l  clinics.^  1  1  1 - Source:  III.  V a r i a b l e r e l a t e d to the TEACHING ROLE of h o s p i t a l s - Number -  IV.  of i n t e r n s and r e s i d e n t s by s p e c i a l t y . ^ interns r e s i d e n t s c l i n i c a l monitors residents i n surgical specialties residents i n medical s p e c i a l t i e s residents i n laboratory s p e c i a l t i e s residents i n r a d i o l o g i c a l s p e c i a l t i e s r e s i d e n t s i n f a m i l y medicine  V a r i a b l e r e l a t e d to the RESEARCH ACTIVITIES of h o s p i t a l s - % of r e s e a r c h budget  V.  to admissible e x p e n d i t u r e s .  1  V a r i a b l e s r e l a t e d to ORGANIZATION FACTORS i n h o s p i t a l s -  Turnover r a t e of n u r s i n g p e r s o n n e l . Rate of occupancy. Number of s e p a r a t i o n s per b e d . Number of beds by s t a t u s . - p h y s i c a l care s h o r t - t e r m - p h y s i c a l care long-term ( r e h a b i l i t a t i o n ) - p h y s i c a l care long-term (convalescence) , - p s y c h i a t r i c care short-term - p s y c h i a t r i c c a r e long-term - n u r s i n g home c a r e - Index of d i s t a n c e from urban c e n t r e s . ^ 1  1  1  1  M i n i s t r y of S o c i a l A f f a i r s , F i n a n c i n g Branch ( a c c o r d i n g to forms DGF-1, or AH-101 f i l l e d i n by hospitals) 2 - Source: Quebec P r o f e s s i o n a l C o r p o r a t i o n of P h y s i c i a n s 3 - Source: Quebed H e a l t h Insurance Board 4 - Valued 0 i f the h o s p i t a l i s l o c a t e d i n a town of 15,000 i n h a b i t a n t s or more; 1 i f i t i s 12 m i l e s or l e s s d i s t a n c e from a town of 15,000 or more; 2, i f i t i s 12 to 24 m i l e s d i s t a n c e from such a town; 3, i f i t i s 24 to 36 m i l e s d i s t a n c e from such a town; and 4, i f i t i s 36 m i l e s and over d i s t a n c e from such a town.  51.  Once t h e h o s p i t a l s have been c l a s s i f i e d  i n t o groups the review  p r o c e s s of budgetary bases proceeds to the next two s t a g e s :  first,  h o s p i t a l w i t h i n each group i s compared on a number of performance c a t o r s to t h e average f o r the group, to determine whether  each  indi-  i t is in a  p o s i t i o n of r e l a t i v e excess or economy of r e s o u r c e s ; second, a p o l i c y i s developed f o r more e q u i t a b l e d i s t r i b u t i o n of t o t a l 2.6.6.  resources.  A p p l i c a t i o n of t h e I n f o r m a t i o n Theory Measure i n the  U.S.  A p p l i c a t i o n of t h e i n f o r m a t i o n t h e o r y approach to the a n a l y s i s of c a s e mix c o m p l e x i t y has not been c o n f i n e d t o Canada. r e c e n t l y the f i r s t testing  i t s ability  different nor  s t u d i e s have been undertaken i n the U n i t e d  States,  t o p r e d i c t h o s p i t a l c o s t s i n a system t h a t i s q u i t e  from t h e Canadian system because i t i s n e i t h e r  vertically  integrated  (Horn and Schumacher, 1979).  regionalized N e v e r t h e l e s s , the  r e s e a r c h e r s have demonstrated i t s a p p l i c a b i l i t y to the American system  More  health  [Horn and Schumacher (1979); Schumacher, Horn, S o l n i c k , Cook and  A t k i n s o n (1980) ] . The f i r s t  study a p p l y i n g the i n f o r m a t i o n t h e o r y measure of case  mix c o m p l e x i t y to U.S.  d a t a was undertaken by Horn and Schumacher (1979).  They d i d not attempt t o b u i l d t h i s measure of case mix c o m p l e x i t y i n t o a r e g r e s s i o n a n a l y s i s i n o r d e r to p r e d i c t h o s p i t a l c o s t s . purpose was  Rather  their  t o compare t h i s measure w i t h a c l i n i c a l measure of case mix  complexity. The c l i n i c a l measure of case mix c o m p l e x i t y was  developed by  Thompson, F e t t e r and o t h e r s a t Y a l e U n i v e r s i t y and Y a l e New Hospital. section.  Haven  More d e t a i l e d d i s c u s s i o n of t h i s method o c c u r s i n the next Briefly,  the method i s a way  D i a g n o s i s R e l a t e d Groups  of c l a s s i f y i n g p a t i e n t s i n t o  (DRGs) which a r e m u t u a l l y e x c l u s i v e and  383  52  e x h a u s t i v e c a t e g o r i e s w i t h s i m i l a r c l i n i c a l a t t r i b u t e s i n terms o f primary d i a g n o s i s , secondary and  clinical  service.  d i a g n o s i s , s u r g i c a l procedures,  age and sex  They a l s o have s i m i l a r p a t t e r n s o f output  t i o n as measured by l e n g t h o f s t a y .  utiliza-  T h i s scheme d i f f e r s from the most  f r e q u e n t l y a p p l i e d d e f i n i t i o n o f case mix, which i s based  on the p a t i e n t ' s  primary d i a g n o s i s coded a c c o r d i n g t o the I n t e r n a t i o n a l C l a s s i f i c a t i o n o f D i s e a s e s Adapted  (ICDA),  i n the sense  that i t not only s p e c i f i e s a  d i a g n o s i s but r e l a t e s t h i s d i a g n o s t i c i n f o r m a t i o n (and o t h e r demographic and  t h e r a p e u t i c i n f o r m a t i o n ) t o output u t i l i z a t i o n ,  measure o f i t s r e l a t i v e  thus p r o v i d i n g a  complexity.  Horn and Schumacher (1979) assumed t h a t the degree o f c o n c e n t r a t i o n ( p r o v i d e d by T h e i l ' s expected all  i n f o r m a t i o n measure) o f the 383 DRGs f o r  l i v e h o s p i t a l d i s c h a r g e s from 45 Maryland  October  h o s p i t a l s f o r the p e r i o d  1976 t o March 1977, r e p r e s e n t e d the r e l a t i v e complexity o f each  of these 383 DRGs.  They then examined the index o f complexity o f the  DRGs t o see whether, i n t u i t i v e l y , complexity o f diagnoses. ments o c c u r r e d — e . g .  i t p r o v i d e d a good measure of the  They found 167 DRGs where i n t u i t i v e d i s a g r e e -  a DRG f o r a d i s e a s e w i t h s u r g e r y had a lower  informa-  t i o n theory complexity v a l u e than another DRG f o r the same d i s e a s e without surgery.  They r e v i s e d the c l a s s i f i c a t i o n o f DRGs from 383 t o 272 and  r e c a l c u l a t e d the r e l a t i v e c o m p l e x i t y v a l u e s .  They then compared the  i n f o r m a t i o n theory complexity numbers w i t h "one author's  (DNS) judgements  as t o whether the DRG was a s s o c i a t e d w i t h h i g h o r low m o r t a l i t y and/or c l i n i c a l complexity" statistically  (Horn and Schumacher, 1979, 387).  They found a  s i g n i f i c a n t agreement between the two measures o f case mix  c o m p l e x i t y , which l e d them to conclude  t h a t " i n f o r m a t i o n theory has the  p o t e n t i a l t o be u s e f u l i n q u a n t i f y i n g case mix c o m p l e x i t y "  (388).  53  A l a t e r study by Schumacher, Horn, S o l n i c k , A t k i n s o n and Cook (1980) used  t h i s i n f o r m a t i o n t h e o r e t i c approach t o o b t a i n a measure of  case mix c o m p l e x i t y  t o a n a l y s e h o s p i t a l c o s t p e r case i n 216 acute  h o s p i t a l s i n Maryland.  They used  t h e 383 DRGs t o d e f i n e case mix r a t h e r  than t h e 98 d i a g n o s t i c c a t e g o r i e s from the ICDA which Evans and Walker (1972) had used.  R e g r e s s i o n e q u a t i o n s were developed  which p r e d i c t e d up  t o 88 p e r c e n t of t h e v a r i a n c e i n i n t e r - h o s p i t a l c o s t p e r case, w i t h t h e c o m p l e x i t y v a r i a b l e b e i n g one o f the most h i g h l y s i g n i f i c a n t  predictors.  The r e s u l t s a l l o w e d f o r the i d e n t i f i c a t i o n of a number o f h i g h c o s t h o s p i t a l s i l l u s t r a t i n g the p o t e n t i a l a p p l i c a t i o n o f t h i s approach t o a system o f p r o s p e c t i v e c o s t p e r case 2.6.7.  reimbursement.  D i a g n o s i s R e l a t e d Groups ( F e t t e r e t a l . , 1980) The purpose o f d e v e l o p i n g t h e p a t i e n t c l a s s i f i c a t i o n scheme 20  known as the D i a g n o s i s R e l a t e d Groups (DRGs)  was t o d e f i n e c a s e s , n o t  o n l y i n terms o f t h e i r c l i n i c a l a t t r i b u t e s but a l s o i n terms o f t h e i r u t i l i z a t i o n of hospital f a c i l i t i e s .  Each d i a g n o s t i c c a t e g o r y  then  r e p r e s e n t s "a c l a s s of p a t i e n t s w i t h s i m i l a r p r o c e s s e s of c a r e and a p r e d i c t a b l e package of s e r v i c e s ( o r product) et a l . ,  from an i n s t i t u t i o n "  1980, 3 ) . Thus t h e scheme of DRGs d e f i n e s the t o t a l  (Fetter  hospital  product w i t h each p a t i e n t c l a s s r e p r e s e n t i n g a p a r t i c u l a r p a t t e r n o f 21 r e s o u r c e consumption [1971] t e r m s ) .  (an i s o r e s o u r c e ' c a t e g o r y 1  i n Lave and Lave's  By e s t a b l i s h i n g t h i s r e l a t i o n s h i p between t h e case mix o f  the h o s p i t a l and t h e r e s o u r c e s i t consumes, t h i s c l a s s i f i c a t i o n scheme i s p o t e n t i a l l y u s e f u l i n p a t i e n t c a r e m o n i t o r i n g , budgeting, reimbursement and p l a n n i n g  cost control,  ( F e t t e r e t a l . , . 1980, 2 ) .  The DRGs were c o n s t r u c t e d u s i n g t h r e e d i f f e r e n t types o f i n p u t s : p h y s i c i a n judgment was r e q u i r e d t o ensure p a t i e n t groups were m e d i c a l l y  54  m e a n i n g f u l ; d a t a from acute h o s p i t a l s were examined to determine c h a r a c t e r i s t i c s and  frequency  of a c t u a l d i s c h a r g e s ; a s t a t i s t i c a l a l g o r i t h m was  employ-  ed to a s s i s t the f o r m a t i o n o f homogeneous p a t i e n t c l a s s e s d e f i n e d i n terms o f a s p e c i f i e d u t i l i z a t i o n measure. i n d i c a t o r of output  utilization.  Length of s t a y (LOS)  chosen as  They argue t h a t "while i t may  a c c u r a t e an i n d i c a t o r of the l e v e l of output an important  was  not be  the as  as a c t u a l c o s t s , i t i s s t i l l  i n d i c a t o r o f u t i l i z a t i o n as w e l l as b e i n g e a s i l y a v a i l a b l e , w e l l  s t a n d a r d i z e d and  reliable"  ( F e t t e r e t a l . , 1971,  5).  Lave and  Leinhardt  (1976) make a s i m i l a r c l a i m about the importance of l e n g t h o f s t a y as i n d i c a t o r of performance.  The a p p r o p r i a t e n e s s  put i n d i c a t o r i s d i s c u s s e d l a t e r i n t h i s  of l e n g t h of s t a y as an  Major D i a g n o s t i c C a t e g o r i e s .  by a committee of c l i n i c i a n s who  out-  chapter.  A l l d i a g n o s e s were i n i t i a l l y d i v i d e d i n t o 83 m u t u a l l y c o l l e c t i v e l y exhaustive  an  exclusive  T h i s was  and  performed  developed these c a t e g o r i e s from the 1CDA8  and HICDA v e r s i o n s of the I n t e r n a t i o n a l C l a s s i f i c a t i o n o f D i s e a s e s  Adapted.  The Major D i a g n o s t i c C a t e g o r i e s were c o n s i s t e n t i n terms of t h e i r anatomic and  p h y s i o l o g i c a l c l a s s i f i c a t i o n as w e l l as p a t t e r n s o f c l i n i c a l management;  they covered  a l l codes w i t h no o v e r l a p ; t h e r e was  p a t i e n t s i n each  a s i g n i f i c a n t number o f  category.  A c o n s i s t e n t p r o c e s s was Diagnostic Categories  i n t o 383  f o l l o w e d to p a r t i t i o n the 83 Major. DRGs.  F i r s t , a new  computer system  developed t h a t c o u l d handle l a r g e d a t a bases e f f i c i e n t l y and  was  operate  an i n t e r a c t i v e b a s i s to accommodate c l i n i c a l i n p u t from p h y s i c i a n s . new  system was  I t had  c a l l e d AUTOGRP ( M i l l s , F e t t e r , R i e d e l , A v e r i l l ,  the c a p a b i l i t y to draw on an a l g o r i t h m t h a t s u b d i v i d e s  on This  1976). the 83 Major  D i a g n o s t i c Groups i n t o subgroups based on a number of p r e - s p e c i f i e d v a r i a b l e s t h a t "maximize v a r i a n c e r e d u c t i o n or minimize the p r e d i c t i v e e r r o r of the dependent v a r i a b l e " ( F e t t e r e t a l . , 1980,  6).  22  The  55  Al Utrin iary Cacluu ls Palfi»o  O  4 24 28 • e lngth of stay e  12 16 20  32  (days)  No  Surgery  Minor  Surgeries Mojor n m«on sd  «  CO 2* 29 e lngth of stay [dcys) 6  12 16  i2 i 6 ' 20 24 29 32 ler-jth of stay (days) ORG 24i  J2  Surgere is • 286 = 14 9 9 = 7 39  4-8 12 6 ' 20 2« 28 32 e lrvgt,h f stay (daj») D R 24 U iTlG ary«om C,j2oC iuu l«ltolC »iih Cyrn O «'1u "Tij, n^ffi,orCKTIy_ otn»f  0  0  Pt««nc« of S4Cor*5aty  Nonsurgcial Group  24 e lngth of stoy (days) DRG Urn iary CotcJu* >tr> iour fQ i#<T  0  «  8  12 16 2 0  28 32  239  U  F i g u r e 2.3.  Source:  e lngth of stay (days) DRG Lfciftof, Cotcul«j .(houl luigiry  0  4  B  12 i6 20 24 28 32  240  Summary o f l e n g t h s o f s t a y d i s t r i b u t i o n f o r DRGs formed i n p a r t x t i o n m g process.  Fetter et a l .  (1980, 19, f i g u r e 2 ) .  56  p r e s p e c i f i e d independent v a r i a b l e s were diagnoses, age,  sex and c l i n i c a l  was l e n g t h o f s t a y .  service.  surgical  procedures,  The dependent v a r i a b l e , as s t a t e d  earlier,  The independent v a r i a b l e s t h a t y i e l d e d the h i g h e s t  percentage r e d u c t i o n i n v a r i a n c e o f l e n g t h o f s t a y were the v a r i a b l e s employed t o d i v i d e the d a t a s e t .  Other f a c t o r s were a l s o  considered:  the groups had t o be homogenous from a c l i n i c a l p o i n t o f view; the number of groups had t o be manageable; the means o f the groups had t o be cantly different  signifi-  from one another.  Thus the r e s u l t i n g 383 DRGs were d e f i n e d by some s e t of: the f o l l o w i n g patient attributes:  primary d i a g n o s i s , secondary d i a g n o s i s , primary  s u r g i c a l procedure, secondary s u r g i c a l procedure, age, and ( i n one case) clinical  s e r v i c e area.  Sex was i n c l u d e d as an independent v a r i a b l e but  i t was found not t o be s i g n i f i c a n t i n r e d u c i n g v a r i a n c e i n l e n g t h of s t a y (see F i g u r e 2.3). The  s t r u c t u r e o f the DRGs v a r i e d c o n s i d e r a b l y .  D i a g n o s t i c C a t e g o r i e s were not s u b d i v i d e d  Some Major  a t a l l because p a r t i t i o n i n g on  the b a s i s o f the d e f i n i n g v a r i a b l e s d i d n o t produce sub-groups which were s i g n i f i c a n t l y d i f f e r e n t i n terms of the measure o f output (length of stay).  utilization  On the o t h e r hand one Major D i a g n o s t i c Category 76,  F r a c t u r e s , was p a r t i t i o n e d i n t o 13 subgroups o r DRGs. The records  DRG scheme was c o n s t r u c t e d  from a data base o f 500,000 h o s p i t a l  from 118 h o s p i t a l s i n New J e r s e y , 150,000 r e c o r d s  Connecticut  from one  h o s p i t a l and 52,000 r e c o r d s of f e d e r a l l y funded p a t i e n t s  from 50 i n s t i t u t i o n s i n a PSRO r e g i o n .  Young, Swinkola and Hutton (1980)  t e s t e d i t s e x t e r n a l v a l i d i t y by a p p l y i n g the same method t o the p a t i e n t p o p u l a t i o n o f Western P e n n s y l v a n i a .  The 383 DRGs t h a t were d e r i v e d f o r  the p a t i e n t p o p u l a t i o n i n New J e r s e y d i d not r e - o c c u r when the same  57  AUTOGRP c l a s s i f i c a t i o n a l g o r i t h m was a p p l i e d t o Western P e n n s y l v a n i a population  data.  They concluded t h a t the p a t i e n t c l a s s i f i c a t i o n scheme  i s n o t independent o f the p o p u l a t i o n These same r e s e a r c h e r s 383  Diagnosis  Related  observed.  a l s o t e s t e d the i n t e r n a l homogeneity o f the  Groups t o see i f they were comprised o f p a t i e n t s  who had a s i m i l a r p a t t e r n o f r e s o u r c e  consumption.  They c l a s s i f i e d the  Western P e n n s y l v a n i a p a t i e n t s i n t o the 383 DRGs as d e f i n e d by F e t t e r e t al.  They then a p p l i e d the AUTOGRP c l a s s i f y a l g o r i t h m  t o see i f the  p a t i e n t s i n these c l a s s e s c o u l d be p a r t i t i o n e d i n t o other  groups. I n  other words they took the a c t u a l l e n g t h o f s t a y o f P e n n s y l v a n i a p a t i e n t s i n these 383 DRGs and t e s t e d t o see whether v a r i a t i o n i n the l e n g t h o f s t a y w i t h i n a DRG c o u l d be s i g n i f i c a n t l y reduced i f the p a t i e n t s were d i v i d e d on the b a s i s of the same independent v a r i a b l e s sex,  s u r g i c a l operations,  used.  (diagnoses, age,  c l i n i c a l s e r v i c e ) as F e t t e r e t a l . (1980) had  They a l s o i n c l u d e d some a d d i t i o n a l ; d e f i n i n g v a r i a b l e s .  analysis revealed  that s i g n i f i c a n t reduction  s t a y c o u l d be achieved  Their  i n v a r i a t i o n of length of  i n some DRGs by p a r t i t i o n i n g the p a t i e n t s  d i f f e r e n t groups on the b a s i s o f these independent v a r i a b l e s . cluded  into  They con-  t h a t cases which were assumed t o be s i m i l a r by F e t t e r e t a l . were  e i t h e r d i s s i m i l a r o r e l s e they were managed d i f f e r e n t l y i n d i f f e r e n t hospitals. Another problem w i t h the DRG c l a s s i f i c a t i o n scheme i s t h a t i t assumes t h a t the e f f e c t s o f the d e f i n i n g v a r i a b l e s are  s t a b l e over time.  an example. patient  T h i s problem can be b e s t  (age,  surgery, e t c . )  explained  V a r i a t i o n i n l e n g t h of s t a y f o r every u r i n a r y  (see F i g u r e  secondary d i a g n o s i s ,  by l o o k i n g a t calculus  2.3) i s reduced by the v a r i a b l e s , surgery and t o o b t a i n 4 d i f f e r e n t DRGs.  This occurred  because  58  none of the o t h e r d e f i n i n g v a r i a b l e s (age, v a r i a t i o n i n length of stay. which t h i s scheme was age-sex group.  I t may  developed had  sex) had  a significant effect  have been t h a t the p a t i e n t sample from u r i n a r y c a l c u l u s p a t i e n t s i n the same  ( T h i s i s not a c r i t i c i s m of the sample as i t may  the t r u e p a t t e r n o f u r i n a r y c a l c u l u s among the p o p u l a t i o n ) .  represent  However, i f over  time, the i n c i d e n c e o f u r i n a r y c a l c u l u s changes so t h a t i t a f f e c t s a ent age-sex group, these v a r i a b l e s may r e s u l t i n g i n d i f f e r e n t DRGs.  The  become  differs  significant defining variables  c r i t i c i s m i s t h a t the DRG  l e c t i o n o f the age-sex s t r u c t u r e and  scheme i s a  ref-  p a t t e r n s o f m e d i c a l p r a c t i c e (both i n  terms of t h e r a p e u t i c i n t e r v e n t i o n and o r i g i n a l patient population.  on  l e n g t h of s t a y ) t h a t e x i s t e d i n the  T h i s b i a s i s b u i l t i n t o the scheme and  cannot  be adapted w i t h o u t a r e - d e f i n i t i o n of the t o t a l c l a s s i f i c a t i o n scheme. F i n a l l y , a minor c r i t i c i s m r e l a t e s to the e x c l u s i o n of deaths from data base i n the development of the DRGs.  F e t t e r e t a l . (1980, 8) remove  them on the b a s i s t h a t t h e i r " l e n g t h s of s t a y were p r o b a b l y d i s e a s e or problem under c o n s i d e r a t i o n " . stay associated with  and  a t y p i c a l of  T h i s i s the c a s e — t h e l e n g t h s  deaths are u n p r e d i c t a b l e .  However, i n the f i n a l a n a l y s i s , they are s t i l l  general  of  a p a r t of t o t a l  costs  elegance.  c o n c l u s i o n from t h i s c r i t i q u e of the DRGs i s t h a t l e n g t h  s t a y • i s not a good i n d i c a t o r of output u t i l i z a t i o n . sense t h a t i t can be manipulated by  significantly  Furthermore, i t does not c o r r e l a t e  w e l l w i t h a c t u a l c o s t s because i t does not d i s c r i m i n a t e s u f f i c i e n t l y among d i f f e r e n t case t y p e s .  of  I t i s endogenous i n the  the h o s p i t a l ; i t can v a r y  depending on m e d i c a l p r a c t i c e p a t t e r n s .  or  to which they  t h e r e f o r e should not be assumed away f o r the sake of s t a t i s t i c a l The  the  They can b e " e i t h e r h i g h e r  lower than the average f o r the p a r t i c u l a r d i s e a s e c a t e g o r y belong.  the  For i n s t a n c e , t h e . r e l a t i v e complexity  o f a DRG  terms of l e n g t h of s t a y i s o n l y a v a i l a b l e f o r DRGs w i t h i n each of the  in 83  59  Major D i a g n o s t i c  Groups.  I t i s not p o s s i b l e to assume the c o s t o f a case  belonging  to one Major D i a g n o s t i c  Category i s the same as the c o s t o f a case  belonging  to another Major D i a g n o s t i c  length of stay.  Category simply  because i t has the same  {  The scheme i s a l r e a d y b e i n g  a p p l i e d to p r o s p e c t i v e  c o s t per case r e i m -  23 bursement  i n the s t a t e o f New  bursement  r a t e i s s e t f o r each DRG  on the b a s i s o f a p r o p o r t i o n DRG  Jersey.  In t h i s s t a t e , a d i f f e r e n t i a l r e i m -  i n each h o s p i t a l .  This rate i s e s t a b l i s h e d  o f the a c t u a l c o s t o f t r e a t i n g p a t i e n t s i n t h a t  i n t h a t h o s p i t a l and a p r o p o r t i o n o f the average c o s t o f t r e a t i n g p a t i e n t s  i n t h a t DRG  i n the s t a t e g e n e r a l l y .  cost accounting the U.S.  by a d e t a i l e d  approach d e s c r i b e d by Thompson, A v e r i l l and F e t t e r (1979) and  Department  2.6.8.  These c o s t s a r e o b t a i n e d  of Health  E d u c a t i o n and W e l f a r e (1979).  Resource Need Index  The Resource Need Index (RNI) has been developed by the Commission P r o f e s s i o n a l and H o s p i t a l A c t i v i t i e s complexity of a h o s p i t a l ' s caseload on the b a s i s o f average charge d a t a .  (CPHA). defined  I t i s an i n d e x - o f  on  the r e l a t i v e  i n terms o f d i a g n o s i s  and measured  I t i s based on the assumption  that  charges a r e a proxy f o r a c t u a l c o s t s and t h e r e f o r e , the index r e f l e c t s the r e l a t i v e costs or r e l a t i v e resource  consumption o f the h o s p i t a l .  I t enables  c o s t comparison among h o s p i t a l s and i s a t o o l to a s s i s t i n h o s p i t a l reimbursement. The Resource Need Index i s c a l c u l a t e d from two f a c t o r s : case mix Resource Need U n i t s  (RNUs).  Case mix i s d e f i n e d  p a t i e n t s c l a s s i f i e d by d i a g n o s i s , age and whether  and  i n terms o f the number o f o r not surgery  was  performed.  Cases a r e grouped i n t o 349 c a t e g o r i e s which a r e r e a s o n a b l y homogeneous i n terms o f d i a g n o s i s , p a t t e r n s  o f c a r e and l e n g t h o f s t a y .  These groups a r e  based on the H o s p i t a l A d a p t i o n o f ICDA (H-ICDA) (Second E d i t i o n , CPHA) and  60  compatible w i t h the f i r s t e d i t i o n o f H-ICDA and ICDA-8. c a t e g o r i e s a r e s u b d i v i d e d i n t o f i v e age groups and over) and whether  These  diagnosis  (0-19, 20-34, 35-49, 50-64, 65  the p a t i e n t r e c e i v e d s u r g e r y o r n o t .  This gives a  m a t r i x o f 3490 c e l l s i n t o which a l l p a t i e n t s a r e c l a s s i f i e d . Charge i n f o r m a t i o n f o r each c e l l i s o b t a i n e d from CPHA's Study o f P a t i e n t Charges  (SPC).  An average p a t i e n t charge f o r each c e l l i s c a l c u l a t e d  from a data base c o n s i s t i n g o f 2.8 m i l l i o n c a s e s .  It includes a l l patients  (except deaths, p a t i e n t s t r a n s f e r r e d to another h o s p i t a l and p a t i e n t s  staying  over 70 days) from the 120 h o s p i t a l s p a r t i c i p a t i n g i n SPC f o r a l l o r p a r t o f the  t h r e e y e a r p e r i o d , 1974-77.  teaching  program,  These h o s p i t a l s v a r y i n the e x t e n t o f t h e i r  i n s i z e from under 2,500 to over 25,000 d i s c h a r g e s per  y e a r and r e p r e s e n t a l l f o u r census r e g i o n s  (Ament, 1976).  A l l charge d a t a 24  for  the t h r e e y e a r s i s d e f l a t e d to the 1971-72 d o l l a r v a l u e . The average charge f o r each c e l l  the  i n the m a t r i x i s the base upon which  Resource Need Index i s c o n s t r u c t e d .  The r e l a t i o n s h i p between the average  charge f o r a l l p a t i e n t s and the average charge i n each c e l l ive  value f o r that c e l l .  (RNUs) f o r t h a t  T h i s v a l u e i s known as the Resource Need U n i t s  cell.  Average charge f o r a c e l l Average charge f o r a l l p a t i e n t s  =  RNUs (number o f Resource Need Units f o r that c e l l )  The RNUs a r e used to q u a n t i f y the r e s o u r c e s needed types o f p a t i e n t s . A RNI  g i v e s the r e l a t e  f o r a g i v e n mix o f  T h i s v a l u e i s known as the Resource Need Index  (RNI).  can be c a l c u l a t e d f o r the h o s p i t a l as a whole o r f o r i n d i v i d u a l  s e r v i c e s w i t h i n the h o s p i t a l .  I f the RNI  f o r the whole h o s p i t a l i s  r e q u i r e d , i t can be o b t a i n e d by m u l t i p l y i n g the RNUs i n each c e l l by the number of p a t i e n t s i n each c e l l and d i v i d i n g by the t o t a l number o f p a t i e n t s i n the h o s p i t a l :  61  3490 RNI  =  (RNU.  : P.  .)/P.  i=l where P Pj  i s the number o f p a t i e n t s i n h o s p i t a l j , c e l l i i s the t o t a l number o f p a t i e n t s i n h o s p i t a l j .  See F i g u r e 2.4. I f h o s p i t a l j has an RNI o f 2.00 and h o s p i t a l k has an RNI o f 1.00, it  i s assumed h o s p i t a l j uses t w i c e as many r e s o u r c e s per case as h o s p i t a l k. The main c r i t i c i s m o f the RNI  i s i t s b a s i c assumption  charge d a t a i s a proxy f o r r e s o u r c e consumption. (1979) examined the e x t e n t to which case mix  that h o s p i t a l  Goodisman and  Trompeter  (the p r o p o r t i o n o f p a t i e n t s  fall-  i n g i n t o 44 d i a g n o s t i c c a t e g o r i e s and reduced by f a c t o r a n a l y s i s to 13 f a c t o r s ) e x p l a i n e d average h o s p i t a l charges p e r c a s e .  They found t h a t these case mix  f a c t o r s o n l y e x p l a i n e d about 58 p e r c e n t o f i n t e r - h o s p i t a l v a r i a t i o n i n average t o t a l charge p e r c a s e .  T h i s was  lower than the 72 p e r c e n t o f the v a r i a t i o n :"  i n c o s t per case accounted f o r by Evans' and Trompeter  (1971) d i a g n o s t i c f a c t o r s .  Goodisman  (1979) concluded t h a t t h i s weaker r e l a t i o n s h i p between case mix  and charges v i s - a - v i s case mix and c o s t s was  e x p l a i n e d by " i n t r a h o s p i t a l  c r o s s - s u b s i d i z a t i o n f o r d i f f e r e n t t r e a t m e n t s " (Goodisman and Trompeter, 54).  1979,  Whatever the cause, t h i s l a c k o f s y s t e m a t i c c o v a r i a t i o n between per  p a t i e n t c o s t s and per p a t i e n t charges suggests t h a t charges a r e not a good proxy f o r c o s t s . I d e a l l y the b e s t way o f a s s e s s i n g whether charges i n t h i s i n s t a n c e a r e a good proxy f o r c o s t s would be to compare the average charge i n each d i a g n o s t i c / age/surgery c a t e g o r y o f the RNI m a t r i x w i t h the a c t u a l c o s t f i g u r e . n o t done t h i s comparison because  CPHA has  they do n o t have the e q u i v a l e n t c o s t d a t a .  However, we can assume from Goodisman and Trompeter's  r e s u l t s t h a t the r e l a t -  i o n s h i p between case mix and charges i s not as s t r o n g as the r e l a t i o n s h i p  62  Average Charge Table  '•i:* OP  :o-u 35-49 op•»! i"„"" up  M.L 0-4 9 op  Daignossi | Di»,,„.i, !  5  P  I  s  1 1  rt-f*'!*" ' 1  ^ IO' * 1.1*  t  Cholt-rjMili*  Diaen.^ 346 1 D^inusu 347 I 1 J4J 1 ! Daienm*i 349 1 1 DtnRn>j%t%  S5W*  from SPC  J4W types of patients  RNU Table AUL  AM:  *>P  Cholto&iti Di«Eniri 346 Daignossi 347 DUenfn* i 349 O e r a l A% from SPC Diagnosis  •P  15.  nxzr  Ps™ , , „ £» _  |_SfOl>  F i g u r e 2.4.  Source:  RNI~  1  348  S500 ""  1 J  Average charge for a cell = RNL's (the Average charge for all patients number of Resource Need Units for that cell)  RNI=Average number of RNUs per patient in any group of patients considered.  2"U DipncKi .1. ...... . ! ? « • 9 Croups op op•P•Pvpop•p•P Daignossi | A(.l.  0~tt  . . . the relationship between the average charge for all patients and the cell average gives the relative value for that cell  RNUs' Total Number of Patients  S  u  m  o  f  3-190 t.vpes of patients  Steps i n v o l v e d i n c o n v e r t i n g average charge d a t a to a Resource Need Index.  CPHA, What i s RNI?  Ann A r b o r : CPHA, 1978.  63  between case mix and  costs.  Another c r i t i c i s m of the RNI charges to 1971-72 d o l l a r s . 24 o f t h i s c h a p t e r .  i s r e l a t e d to the method used to d e f l a t e  T h i s adjustment method i s d e s c r i b e d i n f o o t n o t e  The d e f l a t i o n method i s not s e n s i t i v e enough to the  e r e n t i a l r a t e s o f p r i c e i n c r e a s e o f f a c t o r i n p u t s , i . e . wages and s u p p l i e s , drugs, food e t c .  B a r e r and Evans  diff-  salaries,  (1980) have shown t h a t t h e r e i s  q u i t e s i g n i f i c a n t d i f f e r e n c e s i n the r a t e o f i n c r e a s e i n wages (115 p e r c e n t growth over 7 y e a r s ) compared to drugs ( f l a t p r i c e i n d e x o f 10.7 p e r c e n t i n _  7 years). at are  These d a t a i n d i c a t e the importance o f d e f l a t i n g each f a c t o r  a different rate.  T h i s i s not done i n the d e f l a t i o n o f RNI  price  charges which  a l l d e f l a t e d a t the same r a t e . Another p o t e n t i a l problem i s the c e l l r e l i a b i l i t y  The RNI m a t r i x i s so l a r g e — 3 4 9 0 c e l l s — t h a t c e l l s must reduce the r e l i a b i l i t y 2.6.9. Two  o f the RNI m a t r i x .  the s m a l l sample  s i z e i n some  of the average charge f i g u r e .  Common Problems  approaches d i s c u s s e d here d e f i n e the c o m p l e x i t y o f case mix i n a  h o s p i t a l i n terms of a s i n g l e v a l u e d ( i . e .  s c a l a r ) index which i s i n t e n d e d to  c a p t u r e the r e l a t i v e d i f f e r e n c e s i n h o s p i t a l o u t p u t .  Evans and Walker,  and  l a t e r B a r e r , used i n f o r m a t i o n t h e o r y to d e f i n e c o m p l e x i t y v a l u e s f o r 98 d i a g nostic categories. of  these v a l u e s .  The case mix index f o r each h o s p i t a l i s the weighted  sum  Each d i a g n o s t i c c a t e g o r y has a r e l a t i v e weight and each hos-  p i t a l has a r e l a t i v e index t h a t i s d i r e c t l y r e l a t e d to these i n d i v i d u a l / w e i g h t s The Resource Need Index i s c o n s t r u c t e d i n a s i m i l a r manner: each d i a g n o s t i c c e l l i s a s s i g n e d a Resource Need U n i t v a l u e , which i s a r a t i o o b t a i n e d by  div-  i d i n g the average charge f o r t h a t c e l l by the average charge f o r a l l p a t i e n t s and the Resource Need Index f o r the h o s p i t a l i s d e r i v e d by summing the Resource Need U n i t s f o r each p a t i e n t and d i v i d i n g by the t o t a l number o f patients.  Again t h e r e i s a d i r e c t r e l a t i o n s h i p between the v a l u e s o f the  case mix weight a s s i g n e d  to the d i a g n o s t i c category  and the index d e r i v e d f o r  the h o s p i t a l . K l a s t o r i n and Watts (1980) c r i t i c i z e  these approaches t h a t reduce d i a g -  n o s t i c c l a s s i f i c a t i o n d a t a i n t o a s i n g l e - v a l u e d case mix index.  They suggest-,  as an a l t e r n a t i v e , a normative w e i g h t i n g  process  practice.  F o r example, "the a p p r o p r i a t e  i n d e x i n g weights might be e s t a b l i s h e d  by a p a n e l  o f r e p r e s e n t a t i v e members o f s o c i e t y w i t h o u t r e g a r d  i n the e m p i r i c a l c h a r a c t e r i s t i c s o f case types etc.)"  t h a t i s d i v o r c e d from a c t u a l  to d i f f e r e n c e s  (e.g. l e n g t h o f s t a y ,  cost,  ( K l a s t o r i n and Watts, 1980, 678).  This suggestion  appears f r a u g h t w i t h  i t s own problems.  First,  such  an approach i s u n l i k e l y to produce a consensus i n the l i g h t o f c u r r e n t evidence which i n d i c a t e s m e d i c a l p r a c t i c e p a t t e r n s a r e n o t u n i f o r m . Second, i t r a i s e s q u e s t i o n s society" i s defined.  about how a " r e p r e s e n t a t i v e member o f  Surely a p o l i t i c i a n f i t s  this description perfectly  but how p r a c t i c a l and u s e f u l would i t be to have p o l i t i c i a n s t h i s task?  performing  They a r e u n l i k e l y t o have the time to devote to such an  e x e r c i s e and they a r e u n l i k e l y to have the c l i n i c a l e x p e r t i s e to d i s t i n g u i s h between case types on the grounds o f t h e i r r e l a t i v e  complexity,  e s p e c i a l l y w i t h o u t t h e a s s i s t a n c e o f e m p i r i c a l d a t a such as l e n g t h o f s t a y and c o s t .  I t seems t h a t the o n l y persons c a p a b l e o f p e r f o r m i n g  this  t a s k would be c l i n i c i a n s , who a r e n o t r e p r e s e n t a t i v e members o f s o c i e t y and who would n o t be a b l e t o d i v o r c e themselves from t h e i r c u r r e n t p r a c t i c e patterns. A r a t h e r s i g n i f i c a n t problem common to these case mix s t a n d a r d i z a t i o n techniques  discussed  i n t h i s chapter  f o r the s e v e r i t y o f a d i a g n o s i s . the r e l a t i v e complexity  i s their i n a b i l i t y  to account  Patients are c l a s s i f i e d according to  of t h e i r diagnosis v i s - a - v i s other  diagnoses  65  but not a c c o r d i n g to the l e v e l s of s e v e r i t y or stages of t h e i r  particular  diagnosis. Gonnella and Goran (1975) i d e n t i f i e d Stage I - d i s e a s e w i t h no  t h r e e l e v e l s of s e v e r i t y :  c o m p l i c a t i o n s o r problem of minimal s e v e r i t y ;  Stage I I - d i s e a s e w i t h l o c a l c o m p l i c a t i o n s or problem of moderate s e v e r i t y ; Stage I I I - d i s e a s e w i t h systemic a serious nature.  J u s t as c o m p l e x i t y  c o m p l i c a t i o n s or a problem of  of d i a g n o s i s has  r e s o u r c e usage,so does the s e v e r i t y of d i a g n o s i s . used the s t a g i n g mechanism developed  and,  They p r e s e n t e d  as h y p o t h e s i z e d ,  w i t h a more severe d i s e a s e stage generated charges,  a n c i l l a r y charges and had  Garg e t a l . (1978)  by Gonnella and Goran to examine  u t i l i z a t i o n of s e r v i c e s f o r 24 diagnoses. e i g h t of these diagnoses  implications for  the r e s u l t s f o r  they found  that p a t i e n t s  s u b s t a n t i a l l y higher  l o n g e r l e n g t h s of s t a y .  s e v e r i t y of d i a g n o s i s does have i m p l i c a t i o n s f o r c o s t s and i d e a l l y , be c o n s i d e r e d  i n h o s p i t a l cost a n a l y s i s .  total  Thus the should,  However, the  technique  used to d e f i n e the stages r e q u i r e s a s u b s t a n t i a l amount of p h y s i c i a n i n p u t and  so to d e f i n e stages a c r o s s a l l d i a g n o s t i c c a t e g o r i e s would  a monumental t a s k .  The  d e f i n i t i o n of stages a l s o r e f l e c t s the  particular  m e d i c a l p r a c t i c e p a t t e r n s of the p h y s i c i a n s p r o v i d i n g the i n p u t which not be uniform. i t would add  dimension to the d i a g n o s i s m a t r i x , which may  d i f f i c u l t o r i m p o s s i b l e to handle i n some approaches to case  make i t  mix  To date c l a s s i f i c a t i o n of s e v e r i t y has been used p r i 25  m a r i l y f o r u t i l i z a t i o n review  and  S e v e r i t y of d i a g n o s i s i s not  quality  review.  to be confused  with yet  another  dimension of case m i x — i n t e n s i t y , which r e f e r s to the q u a n t i t y of resources  may  I f s t a g i n g were i n c l u d e d i n the s t a n d a r d i z a t i o n p r o c e s s ,  another  standardization.  be  r e q u i r e d to t r e a t a g i v e n type of case per day  of s t a y  66  (Luke, 1979).  T h i s has  i s made on a per day  i m p l i c a t i o n s f o r reimbursement schemes i f payment  basis.  R e s t u c c i a and Murphy (1980) have used  i n t e n s i t y measure i n t h e i r study of h o s p i t a l use  and  this  cost i n nine  h o s p i t a l s i n Michigan. A t h i r d problem common to Lave and Lave (1971, 1972, DRG  scheme and  mix  i n terms of d i a g n o s i s , and whether or not  diagnosis  exogenously (not by the way  Thus, by  measure of c a s e l o a d t r e a t i n g that  2.7.  surgery was  the h o s p i t a l ) w h i l e (and  performed.  a m i x t u r e of both i n p u t and  i s a c h a r a c t e r i s t i c of the case and  the case i s t r e a t e d  hospital).  surgery  output  i s determined  is a characteristic  i s determined by  i n c l u d i n g surgery  the d o c t o r s  at  of  the  i n the adjustment p r o c e s s ,  the  i s contaminated by d e c i s i o n s the h o s p i t a l makes about  caseload.  Summary of S t a n d a r d i z a t i o n E a r l i e r i n t h i s chapter  of Output i n Terms of Case  i t was  Mix  stated that prospective  reimburse-  ment w i l l o n l y be e f f e c t i v e i n c o n t r o l l i n g c o s t s i f the r e l a t i v e formance of the h o s p i t a l s can be e v a l u a t e d realistically  the  the Resource Need Index i s the s t a n d a r d i z a t i o n of case  T h i s s t a n d a r d i z a t i o n t e c h n i q u e has aspects:  1973),  and  a l l o c a t e resources  s t a n d a r d i z a t i o n f o r case mix summarizes the advantages and  i n order  equitably.  per-  to s e t budgets  This requires  d i f f e r e n c e s among h o s p i t a l s .  accurate  This section  disadvantages of the v a r i o u s approaches to  output s t a n d a r d i z a t i o n i n terms of case mix,  from the p o i n t of view of 26  t h e i r usefulness 2.7.1.  i n s t r u c t u r i n g the h o s p i t a l reimbursement system.  Diagnostic Factor  Proportions  Evans (1971) showed t h a t u s i n g d i a g n o s t i c f a c t o r p r o p o r t i o n s to s t a n d a r d i z e over p r e v i o u s  f o r case mix  d i f f e r e n c e s was  attempts to s t a n d a r d i z e  a dramatic improvement  h o s p i t a l output on the b a s i s of  the  67  a v a i l a b i l i t y of s e r v i c e s and f a c i l i t i e s i n the h o s p i t a l . also explained  This  approach  more i n t e r - h o s p i t a l c o s t v a r i a t i o n than F e l d s t e i n ' s  method of d e f i n i n g case mix i n terms of s p e c i a l t i e s . tage of .this approach was  (1967)  The main d i s a d v a n -  the number of v a r i a b l e s r e q u i r e d  to  represent  case mix. 2.7.2.  I n f o r m a t i o n Theory Evans and Walker  (1972) found the i n f o r m a t i o n  theory  approach to case mix s t a n d a r d i z a t i o n has a number of advantages: ( i ) case mix i s d e f i n e d  i n terms of a s i n g l e v a r i a b l e which  e x p l a i n s almost the same amount of i n t e r - h o s p i t a l c o s t v a r i a t i o n as the 10 d i a g n o s t i c  factor  proportions;  ( i i ) t h i s s i n g l e v a r i a b l e i s i n the form of an index which ranks h o s p i t a l s on a r e l a t i v e s c a l e .  Thus the r e l a t i v e c o m p l e x i t y  of a h o s p i t a l ' s case mix can be e a s i l y q u a n t i f i e d ; (iii)  i t can be used as an independent v a r i a b l e i n a  regression  e q u a t i o n (with average c o s t per case or per day as the dependent  v a r i a b l e ) to determine the r e l a t i v e  of h o s p i t a l s .  efficiency  I t i s independent of average c o s t and  there-  f o r e , average c o s t does not appear on b o t h s i d e s of the equation; 27 ( i v ) the measure appears t o be s t a b l e over time (v) a reimbursement  scheme based on t h i s approach i s not e a s i l y  manipulated by h o s p i t a l a d m i n i s t r a t o r s . administrators  ;  could  Even i f h o s p i t a l  f i n d out which d i a g n o s t i c  categories  are most l u c r a t i v e and they c o u l d sode p a t i e n t s a c c o r d i n g l y , i t would not prove b e n e f i c i a l f o r v e r y l o n g . became i n v o l v e d  As more h o s p i t a l s  i n t h i s a c t i v i t y i t would u l t i m a t e l y  alter  68  the r e l a t i v e c o n c e n t r a t i o n o f cases  and a l t e r the r e l a t i v e d i a g n o s t i c  values. The (i)  d i s a d v a n t a g e s o f the i n f o r m a t i o n theory approach a r e : i t does n o t account f o r the s e v e r i t y o f a p a r t i c u l a r d i a g n o s i s o n l y i t s complexity  i n r e l a t i o n to o t h e r  —  diagnoses.  ( i i ) t h e r e a r e some d i a g n o s t i c c l a s s i f i c a t i o n s t h a t a r e anomalous and do n o t f i t the assumption t h a t i n c r e a s e d c o n c e n t r a t i o n means g r e a t e r case complexity.  The r a r e cases  occur i n s m a l l numbers  and  t h e r e f o r e should n o t a f f e c t the r e l a t i v e w e i g h t i n g  The  common b u t complex cases  (myocardial  o f case v a l u e s .  infarction) s t i l l  remain a  problem. Despite  i t s apparent advantages the i n f o r m a t i o n theory approach has n o t  been i n c o r p o r a t e d i n t o any reimbursement scheme i n e i t h e r Canada o r the United  States.  2.7.3.  Diagnosis  Related  Groups  The major advantage o f t h i s approach to case mix d e f i n i t i o n i s i t s purported group.  ability  to r e f l e c t  the r e s o u r c e use p a t t e r n s o f each d i a g n o s i s  However, t h e t e s t t o see whether i t p r e d i c t s h o s p i t a l c o s t s b e t t e r  than a c l a s s i f i c a t i o n o f p a t i e n t s u s i n g the ICDA has n o t been undertaken. Schumacher e t "al.  (1980) used the DRG scheme w i t h  i n f o r m a t i o n theory and  found t h a t i t was a good p r e d i c t o r o f h o s p i t a l c o s t s .  However, they d i d  not compare i t s p r e d i c t i v e a b i l i t y w i t h the same measure o f complexity  based  on the ICDA c l a s s i f i c a t i o n scheme. Young, Swinkola and Hutton (1980) t e s t e d the e x t e n a l v a l i d i t y o f the DRGs by attempting population.  t o reproduce them u s i n g a d i f f e r e n t p a t i e n t  The 383 DRGs t h a t were d e r i v e d f o r the p a t i e n t p o p u l a t i o n  of New J e r s e y d i d n o t r e - o c c u r , l e a d i n g them to conclude t h a t the p a t i e n t  69  scheme i s n o t independent o f the p o p u l a t i o n  observed.  Another disadvantage of the DRG scheme i s t h a t i t does not p r o v i d e a simple rank or index o f the r e l a t i v e c o m p l e x i t y o f each DRG.  The  r e l a t i v e c o m p l e x i t y o f a DRG i s o n l y a v a i l a b l e f o r the DRGs w i t h i n of the 83 Major D i a g n o s t i c  each  Groups and i s i n d i c a t e d by l e n g t h o f s t a y .  Consequently i t i s not p o s s i b l e t o compute an index f o r the h o s p i t a l simply has  on the b a s i s o f the l e n g t h o f s t a y v a l u e  t o be used i n c o n j u n c t i o n  information  theory  or c o s t i n f o r m a t i o n  t o determine the r e l a t i v e com-  I f cost information  the r e l a t i v e c o m p l e x i t y v a l u e  used t o c o n s t r u c t  The scheme  w i t h another measure of c o m p l e x i t y , e.g.  p l e x i t y of a h o s p i t a l ' s c a s e l o a d . quantify  o f the DRG.  i s used t o  o f the DRG, and then v a l u e s a r e  an index f o r the h o s p i t a l s which i s then used as an  independent v a r i a b l e i n a r e g r e s s i o n e q u a t i o n t o e x p l a i n i n t e r - h o s p i t a l c o s t d i f f e r e n c e s , the case mix v a l u e s  a r e n o t independent o f average c o s t  (per case) and average c o s t appears on both s i d e s o f the e q u a t i o n . The  DRG scheme has been a p p l i e d t o the reimbursement p r o c e s s i n  the s t a t e o f New J e r s e y .  T h i s was done i n i t i a l l y  day  r a t e , f i x e d f o r each d i a g n o s t i c c a t e g o r y .  had  the disadvantage of encouraging l o n g e r  on the b a s i s o f a per  However, t h i s approach  lengths  of stay.  More  r e c e n t l y , t h e r e has been a movement towards a c o s t per case reimbursement system.  A r a t e p e r DRG was s e t i n advance f o r each h o s p i t a l , based on  the a c t u a l c o s t o f t r e a t i n g p a t i e n t s i n t h a t DRG i n t h a t h o s p i t a l and the a c t u a l c o s t o f t r e a t i n g p a t i e n t s i n t h a t DRG f o r the s t a t e T h i s scheme runs the r i s k o f another p r o b l e m — h o s p i t a l s  generally.  .  m a n i p u l a t i n g the l a b e l l i n g p r o c e s s of p a t i e n t s and c l a s s i f y i n g them i n a p p r o p r i a t e l y i n t o more l u c r a t i v e DRGs.  One way of overcoming  problem would be t o use i n f o r m a t i o n  w i t h the DRG  theory  this  classification  70  scheme to measure case mix c o m p l e x i t y . Maryland by Schumacher e t a l . (1980).  T h i s approach was a p p l i e d i n In t h i s way h o s p i t a l case mix  weights a r e determined exogenously by i n f o r m a t i o n t h e o r y and do not p r o v i d e the t e m p t a t i o n f o r m a n i p u l a t i o n by h o s p i t a l a d m i n i s t r a t o r s .  More-  over the case mix weights a r e not c a l c u l a t e d on the b a s i s of average costs.  Consequently the case mix weight can be used as an independent  v a r i a b l e i n a r e g r e s s i o n e q u a t i o n (with average c o s t per case as the dependent v a r i a b l e ) and average c o s t per case does not appear on b o t h s i d e s of the e q u a t i o n . 2.7.4.  Resource Need Index The advantages of the RNI as a method o f s t a n d a r d i z i n g  h o s p i t a l output a r e : ( i ) i t i s not e a s i l y m a n i p u l a t e d by h o s p i t a l a d m i n i s t r a t o r s as they do not have a c c e s s to the m a t r i x of charges so they do not know the r e l a t i v e v a l u e of each d i a g n o s i s c a t e g o r y , ( i i ) i t can be used as an independent v a r i a b l e i n a r e g r e s s i o n e q u a t i o n w i t h average c o s t per case as the dependent v a r i a b l e , (iii)  i t ranks h o s p i t a l s on a r e l a t i v e s c a l e so the d i f f e r e n c e between h o s p i t a l s can be q u a n t i f i e d .  The disadvantages of the RNI  include:  ( i ) i t s assumption t h a t average charge d a t a i s a proxy f o r a c t u a l hospital  costs.  ( i i ) i t s inadequate method o f a d j u s t i n g the charge data to c o n s t a n t dollars. These comments on the r e l a t i v e m e r i t s of each approach a r e based on a p r i o r i r e a s o n i n g and a v a i l a b l e e m p i r i c a l e v i d e n c e .  Most of the  e m p i r i c a l work, however, i s not a d i r e c t comparison of approaches to  71  case mix s t a n d a r d i z a t i o n .  They a r e u s u a l l y t e s t s of the e x t e n t to which  a p a r t i c u l a r approach e x p l a i n s  case mix v a r i a t i o n .  The purpose o f t h i s  study i s t o compare two d i f f e r e n t a p p r o a c h e s — t h e i n f o r m a t i o n approach and the Resource Need I n d e x — b y  theory  examining the e x t e n t to which  they e x p l a i n i n t e r - h o s p i t a l c o s t d i f f e r e n c e s f o r h o s p i t a l s i n A l b e r t a .  72  Reference Notes, Chapter  2  1.  For the o r i g i n a l d i s c u s s i o n s of the p e c u l i a r i t i e s of the h e a l t h i n d u s t r y see Klarman (1965), Arrow (1973), C u l y e r (1973).  2.  T h i s e s t i m a t e was made by the U.S. C o n g r e s s i o n a l Budget O f f i c e (1979). There i s no s i n g l e d a t a source which p r o v i d e s a l l the i n f o r m a t i o n on the type and e x t e n t of h e a l t h i n s u r a n c e coverage. However, more than 80 p e r c e n t of people w i t h p r i v a t e coverage are members of group h e a l t h p l a n s . The m a j o r i t y of workers w i t h group h e a l t h p l a n s are covered f o r h o s p i t a l i n p a t i e n t and o u t p a t i e n t c a r e . T h e r e f o r e we can assume t h a t a l l people w i t h p r i v a t e and p u b l i c i n s u r a n c e coverage are covered f o r h o s p i t a l care.  3.  In f a c t i t may be much more a p p r o p r i a t e and r e a l i s t i c to determine economies o f s c a l e f o r p a r t i c u l a r s e r v i c e s w i t h i n h o s p i t a l s . T h i s has been c o n s i d e r e d by Lee and Wallace (1973), J e n k i n s (1979) and a more s p e c i f i c study o f emergency s e r v i c e has been done by P h i l l i p (1969).  4.  U s e f u l reviews of the l i t e r a t u r e concerned w i t h measuring h o s p i t a l output have been undertaken by B e r k i (1972), Migue and Belanger (1974), T a t c h e l l (1980).  5.  For i n s t a n c e e q u a t i o n 16, T a b l e 2 ( B e r r y , 1967, 137) has a PD ( p a t i e n t days) c o e f f i c i e n t of .001. T h i s suggests t h a t the a c t u a l d i f f e r e n c e i n average c o s t between a h o s p i t a l w i t h 15,000 p a t i e n t days and a h o s p i t a l w i t h 30,000 p a t i e n t days i s o n l y $1.50. T h i s i s not v e r y meaningful i n p o l i c y terms d e s p i t e the f a c t t h a t the c o e f ficient is statistically significant.  6.  Among the most important f a c t o r s were m e d i c a l e d u c a t i o n , b a s i c s e r v i c e s , complex s e r v i c e s , l e n g t h of s t a y , o u t p a t i e n t a c t i v i t i e s .  7.  The 13 i d e n t i f i e d s e r v i c e s a r e : o p e r a t i o n s (weighted), d e l i v e r i e s , d i a g n o s t i c x - r a y s , l a b o r a t o r y examinations, p h y s i c a l therapy t r e a t ments, e l e c t r o c a r d i o g r a m s , t h e r a p e u t i c x-ray treatment, b l o o d t r a n s f u s i o n s , newborn days, o u t p a t i e n t v i s i t s , e l e c t r o e n c e p h a l o g r a m s , emergency room t r e a t m e n t s , and a d u l t and p a e d i a t r i c days (Cohen, 1967, 360).  8.  Reviews of these e a r l y c o s t s t u d i e s have been undertaken Y e t t (1968), H e f t y (1969) and Lave (1966).  by Mann and  9.  A review of t h i s book has been w r i t t e n by Lave and Lave  (1970c).  10.  F e l d s t e i n s t a r t e d w i t h 28 s p e c i a l t y c a t e g o r i e s but he was not a b l e to handle t h i s number w i t h the computer f a c i l i t i e s a v a i l a b l e .  11.  Reimbursement schemes have been reviewed by Bauer and Densen Dowling (1974), and C h a s s i n (1978).  (1974),  73  12.  Blue Cross of Western P e n n s y l v a n i a conducted some of the e a r l y experiments w i t h i n d u s t r i a l e n g i n e e r i n g . See Hardwick and Wolfe (1970), Hardwick and Wolfe (1972), and McCarthy (1975).  13.  T h i s i s d e s c r i b e d by E l n i c k i  14.  May (1972) q u e s t i o n e d whether h o s p i t a l s were r e s p o n s i v e to the potential for achieving surpluses.  15.  F e l d s t e i n ' s work was d i s c u s s e d i n the e a r l i e r i n t h i s chapter.  16.  Comparative s t u d i e s of p a t i e n t c l a s s i f i c a t i o n schemes were undertaken subsequently by Lee and Wallace (1972) and R a f f e r t y (1972). Lee and Wallace (1972) compared f i v e d i f f e r e n t c l a s s i f i c a t i o n schemes based on (1) d u r a t i o n and e x t e n t of d i s a b i l i t y , (2) r i s k of d y i n g , (3) c e l l u l a r p r o c e s s e s w i t h i n the body, (4) 17 broad ICDA codes, and (5) m e d i c a l s p e c i a l t i e s . R a f f e r t y (1972) a l s o compared f i v e d i f f e r e n t ways of c l a s s i f y i n g p a t i e n t s a c c o r d i n g to 50 l e a d i n g d i a g n o s e s , 44 d i a g n o s t i c c a t e g o r i e s , 17 c l i n i c a l s e r v i c e departments, 3 age groups and 2 broad c a t e g o r i e s — - m e d i c a l and s u r g i c a l . These r e s e a r c h e r s showed t h a t the c l a s s i f i c a t i o n based on s p e c i f i c diagnoses and m e d i c a l s p e c i a l t i e s e x p l a i n e d more of the v a r i a t i o n i n case mix than the a l t e r n a t i v e schemes to which they were compared.  17.  The authors b e l i e v e d a p r i o r i t h a t t h i s t h i r d approach would be b e t t e r because i t was 'purposive' i n t h a t " i t embodies whatever p r i o r knowledge and b e s t a v a i l a b l e e s t i m a t e s one has o f the m a r g i n a l c o s t s of the v a r i o u s case mix v a r i a b l e s t o c l u s t e r them" (Lave, Lave and S i l v e r m a n , 1972, 172).  18.  See Evans and Walker (1972) o r Walker (1976) or Barer (1977) or Horn and Schumacher (1979) f o r the mathematical d e r i v a t i o n of t h i s index.  19.  In a d d i t i o n to the two a l t e r n a t i v e measures o f h o s p i t a l c o m p l e x i t y , i n f o r m a t i o n theory can be used to y i e l d t h r e e a l t e r n a t i v e measures of s p e c i a l i z a t i o n : SPCLC1 i s a v a r i a b l e which measures the v a r i a t i o n i n the p r o p o r t i o n of each h o s p i t a l ' s c a s e l o a d f a l l i n g i n t o p a r t i c u l a r d i a g n o s t i c c a t e g o r i e s r e l a t i v e to the p r o p o r t i o n s of d i f f e r e n t diagnoses i n the t o t a l c a s e l o a d of the p r o v i n c e ; SPCLC2 i s the same as SPCLC1 o n l y the base measure i s not the p r o p o r t i o n s of t o t a l c a s e l o a d but the mix o f the average h o s p i t a l ; SPCLC3 i s d e r i v e d u s i n g  (1975).  'economies of s c a l e '  -jjj- as a " p r i o r " d i s t r i b u t i o n , b e g i n n i n g from the assumption are e q u a l numbers o f cases i n each d i a g n o s t i c  section,  that there  class.  20.  T h i s was f i r s t d e s c r i b e d by Thompson, F e t t e r and Mross (1975) and most r e c e n t l y by F e t t e r , S h i n , Freeman, A v e r i l l and Thompson (1980).  21.  Lave and Lave (1971) c o i n e d t h i s phrase to d e s c r i b e case mix d e f i n e d i n terms o f the amount and type of r e s o u r c e s n e c e s s a r y to t r e a t d i f f e r e n t types of p a t i e n t s .  74  22.  T h i s s t a t i s t i c a l methodology i s a v a r i a t i o n of the Automated a c t i o n D e t e c t o r (AID) method o f Sonquist and Morgan (1964).  23.  For a more d e t a i l e d d e s c r i p t i o n of t h i s a p p l i c a t i o n i n New J e r s e y , see U.S. Department of H e a l t h , E d u c a t i o n and W e l f a r e (1979) and F e t t e r et a l . (1980). A l s o see Smedja (1977).  24.  T h i s d e f l a t i o n method i s d e s c r i b e d by Ament and Loup (1974, note 1). To summarize: data on the f i r s t h a l f y e a r ' s p a t i e n t s were used t o b u i l d a p r e l i m i n a r y base t a b l e g i v i n g charges norms (average gross charges) f o r each c e l l i n the m a t r i x . Then f o r each h a l f - y e a r ' s d a t a f o r each h o s p i t a l , a c o r r e c t i o n f a c t o r was o b t a i n e d as f o l l o w s : "For each p a t i e n t i n the h o s p i t a l the a p p r o p r i a t e c e l l was i d e n t i f i e d and the c o r r e s p o n d i n g charges norm looked up i n the p r e l i m i n a r y base table. The sum of these charges norms a c r o s s the h o s p i t a l was divided by the sum of the a c t u a l gross charges to g i v e the c o r r e c t i o n f a c t o r . F i n a l l y , b e f o r e accumulating the charges f i g u r e f o r b u i l d i n g the c u r r e n t base t a b l e , each p a t i e n t ' s gross charge was m u l t i p l i e d by h i s h o s p i t a l ' s c o r r e c t i o n f a c t o r f o r the r e l e v a n t h a l f y e a r " (Ament and Loup, 1975, 5 ) .  25.  A d i s c u s s i o n of s e v e r i t y index development i s p r e s e n t e d by K r i s c h e r (1976), K r i s c h e r (1979), O ' N e i l l , Zador, Baker (1979). These indexes have a v a r i e t y of purposes from p r e d i c t i n g m o r t a l i t y (Cumulative I l l n e s s R a t i n g S c a l e ) t o the t r i a g e of trauma p a t i e n t s (Trauma Index).  26.  B e n t l e y and B u t l e r (1979) p r o v i d e a u s e f u l summary of some case measures and t h e i r reimbursement a p p l i c a t i o n s .  27.  T h i s was shown i n B a r e r ' s hospitals.  (1977) time s e r i e s a n a l y s i s  o f B.C.  Inter-  mix  75  3.  Chapter  Methodology  f o r the Comparison o f Two  to Case Mix S t a n d a r d i z a t i o n ;  Approaches  I n f o r m a t i o n Theory  and the Resource Need Index  A major problem f a c i n g p r o v i n c i a l governments  i n Canada, and  r e i m b u r s i n g a g e n c i e s g e n e r a l l y , i n t h e i r e f f o r t s to c o n t a i n h o s p i t a l c o s t s , i s t h a t o f the d i s t r i b u t i o n o f funds between h o s p i t a l s i n an e q u i t a b l e and e f f i c i e n t manner, t a k i n g adequate account o f d i f f e r e n c e s i n h o s p i t a l output. Chapter 2 reviewed v a r i o u s methods o f h o s p i t a l First,  i t d e s c r i b e d why  reimbursement.  the assumptions o f n e o c l a s s i c a l economic theory  do not h o l d f o r the h o s p i t a l i n d u s t r y — i n h e r e n t p e c u l i a r i t i e s make i t meaningless to t a l k i n terms o f a t e c h n o l o g i c a l l y e f f i c i e n t c o s t curve i n the t r a d i t i o n a l sense. the way  A c o s t - o u t p u t r e l a t i o n can be e s t i m a t e d t h a t  i n which h o s p i t a l s o p e r a t e .  describes  The r e l a t i v e l y e f f i c i e n t o r i n e f f i c i e n t  h o s p i t a l s can be i d e n t i f i e d but i t i s not p o s s i b l e to determine whether the average c o s t - o u t p u t b e h a v i o u r i s the t e c h n i c a l l y most e f f i c i e n t . However, a c c u r a t e e s t i m a t i o n o f t h i s c o s t - o u t p u t e q u a t i o n depends upon s t a n d a r d i z i n g f o r the heterogeneous n a t u r e o f the h o s p i t a l o u t p u t . So Chapter 2 a l s o examines output.  the v a r i o u s methods used to s t a n d a r d i z e h o s p i t a l  These ranged from s t a n d a r d i z a t i o n i n terms o f  and f a c i l i t i e s a v a i l a b l e ,  ( i i ) s e r v i c e s performed,  ( i ) services  ( i i i ) case mix.  Output s t a n d a r d i z a t i o n d e f i n e d i n terms of case mix was  the most  a c c u r a t e approach, c o n t r i b u t i n g more to the e x p l a n a t i o n o f i n t e r - h o s p i t a l  76  c o s t v a r i a t i o n than the other  approaches.  A v a r i e t y of techniques have  been used to a c h i e v e t h i s form of output s t a n d a r d i z a t i o n . (i) factor proportions,  ( i i ) information  Groups, ( i v ) Resource Need Index. the reimbursement p r o c e s s has  theory,  They  include  ( i i i ) Diagnosis  Related  A p p l i c a t i o n of these approaches to  been d e s c r i b e d  i n d e t a i l i n Chapter  2.  The  e m p i r i c a l s e c t i o n of t h i s t h e s i s aims to compare the (extent  two  of these approaches e x p l a i n i n t e r - h o s p i t a l c o s t d i f f e r e n c e s i n  Alberta.  The  Index (RNI). to case mix if  two By  approaches are i n f o r m a t i o n comparing the e x p l a n a t o r y  standardization,  and  the Resource Need  power of these two  i t i s hoped t h a t we  approaches  can determine which,  e i t h e r , c o u l d be used to improve the reimbursement p r o c e s s i n the  province  3.1.  of A l b e r t a .  Form of the H o s p i t a l E q u a t i o n The  methodology i n v o l v e s d e v e l o p i n g  a technological) cost equation. i s derived The  theory  to which  The  a behavioural  (as opposed to  form of the h o s p i t a l c o s t  from the work of Evans and  Walker (1972) and  equation  Barer (1977)."'"  r e p l i c a t i o n of t h e i r model here i s q u i t e d e l i b e r a t e as they have  shown i t to c o n s i s t of a s e r i e s of p l a u s i b l e v a r i a b l e s t h a t f i t w e l l elsewhere. merits  As  the purpose of t h i s t h e s i s i s to a s s e s s the  of the two  measures of case mix  measures of case mix t i o n i n the context  information  of a model whose v a r i a b l e s and  to do  overall  theory this  power of the two  evalua-  explanatory  shown to f i t w e l l i n another s e t t i n g .  thus remains on the e x p l a n a t o r y  v a r i a b l e s and not  and  c o m p l e x i t y ) i t seems a p p r o p r i a t e  power have been t e s t e d and focus  (RNI  relative  major case  The mix  on the j u s t i f i c a t i o n f o r the other v a r i a b l e s used.  77  "We proceed from an i n i t i a l a s s u m p t i o n — t h a t h o s p i t a l i n p a t i e n t c o s t s a r e comprised of a f i x e d (per bed) and a v a r i a b l e (per case) component. I n a d d i t i o n , we a l l o w f o r p o s s i b l e n o n - l i n e a r i t y i n the c a p a c i t y v a r i a b l e by e n t e r i n g beds i n q u a d r a t i c form. S p e c i f i c a l l y , we a r e assuming t h a t TC = p B + P 1  2 B 2  + P  3  (other v a r i a b l e s ) C  where TC = t o t a l i n p a t i e n t c o s t s B = r a t e d bed c a p a c i t y C = cases ( s e p a r a t i o n s p^,P2  = parameters e x p r e s s i n g cost  (marginal  i n year)"  (Barer,  1977,' 111).  the i n f l u e n c e o f bed s i z e on t o t a l  c o s t b e i n g measured by [p'^ + 2p^]) •  p^ = a f u n c t i o n which r e f l e c t s the i n f l u e n c e o f cases on t o t a l costs, constructed  below.  Case here r e f e r s to a l l s e p a r a t i o n s , t r a n s f e r s of a l l p a t i e n t s  i . e . discharges,  ( i n c l u d i n g newborns).  deaths and  'Total c o s t s ' r e f e r s to  i n p a t i e n t a c t i v i t y c o s t s o n l y and e x c l u d e s c o s t s a s s o c i a t e d w i t h o u t p a t i e n t and emergency s e r v i c e s , t e a c h i n g ,  research,  and non-departmental  expenses ( i n c l u d i n g i n t e r e s t on l o a n s , d e p r e c i a t i o n on l a n d  improvement,  d e p r e c i a t i o n on b u i l d i n g s and s e r v i c e equipment, d e p r e c i a t i o n on major 2 equipment and r e n t a l expenses). Case mix f o r each h o s p i t a l i s r e p r e s e n t e d  by the i n f o r m a t i o n  theory  c o m p l e x i t y measure, CMPXC1, and s p e c i a l i z a t i o n measure, SPCLC1 ( t o be d e f i n e d below), or by the Resource Need Index (RNI). of v a r i a b l e s , F^ t o F^, i s i n c l u d e d age-sex d i s t r i b u t i o n .  to adjust  In a d d i t i o n a s e t  f o r t h e i n f l u e n c e o f the  (No s e p a r a t e age-sex v a r i a b l e s a r e i n c l u d e d i n  the e q u a t i o n s w i t h the RNI because age i s i n c l u d e d  i n the c o n s t r u c t i o n  of the RNI.) It  i s a l s o h y p o t h e s i z e d t h a t the c o s t of a s p e c i f i c case i s a  f u n c t i o n o f average l e n g t h o f s t a y , wage l e v e l s w i t h i n a h o s p i t a l , and o f the s k i l l mix o f non-medical s t a f f p e r s o n n e l a t t e n d i n g  t o the p a t i e n t s .  78  Three a d d i t i o n a l v a r i a b l e s  ALS, WAGEL  and WAGE2,  are included to  3 r e p r e s e n t these  factors.  Furthermore, there a r e some n o n - i n p a t i e n t c o s t s which may have an e f f e c t on i n p a t i e n t a c t i v i t y .  F o r example, e d u c a t i o n  i s not a d i r e c t  i n p a t i e n t expense but t h e r e can be no doubt t h a t t e a c h i n g must a f f e c t the n a t u r e  of i n p a t i e n t care.  Thus two v a r i a b l e s , EDRAT and OUTXPD, f o r  4 e d u c a t i o n and o u t p a t i e n t expenses, a r e i n c l u d e d h e r e .  T h e i r purpose i s  two-fold: "(i)  they attempt t o s t a n d a r d i z e f o r any i n f l u e n c e o f these  a c t i v i t i e s which spreads beyond those items which can be s p e c i f i c a l l y d e l i n e a t e d as b e i n g comprised o f e x p e n d i t u r e s o n l y f o r those f u n c t i o n s , and (ii) they p r o v i d e a check on t h e success o f our n o n - i n p a t i e n t e x p e n d i t u r e e l i m i n a t i o n . " ( B a r e r , 1977, 116-117) The s t a n d a r d i z a t i o n procedure y i e l d s a f u n c t i o n , p^, which can be expressed P  3  as f o l l o w s : = a  Q  + a^CMPXCl + a S P C L C l + 2  9 £ i=l  a  ±  +  2  F  ±  a,„ EDRAT + a, 0UTXPD + a..WAGE1 + a,„WAGE2 + a.,ALS 12 13 14 15 16 o  and,  alternatively, p„ = a + a,RNI + a_EDRAT + a 0UTXPD + a.WAGE1 3 0 1 2 3 4 n  o  + a WAGE2 + a,ALS 5 6 r  The v a r i a b l e s here can be d e s c r i b e d as f o l l o w s : "CMPXC1 - . . . t h i s v a r i a b l e i s i n t e n d e d t o c a p t u r e d i f f e r e n c e s a c r o s s h o s p i t a l s i n case-mix p r o p o r t i o n s and i s a measure of t h e complexity o f h o s p i t a l case l o a d ; SPCLC1 - a measure of h o s p i t a l s p e c i a l i z a t i o n i . e . an i n d i c a t i o n of the degree t o which a h o s p i t a l i s l i m i t e d i n i t s c a p a c i t y t o handle a wide range of case t y p e s . " . . . i n g e n e r a l we expect s m a l l h o s p i t a l s t o be more s p e c i a l i z e d as they a r e geared up t o handle o n l y a s m a l l e r range o f cases.' (Evans & Walker, 1972, 402)  79  F -F 1 9  the f a c t o r s c o r e s from a f a c t o r a n a l y s i s o f t h e i n p a t i e n t age-sex d i s t r i b u t i o n o f cases a c r o s s h o s p i t a l s .  WAGE1 - a r e l a t i v e measure of t h e degree t o which a h o s p i t a l u t i l i z e s a s k i l l - i n t e n s i v e non-medical s t a f f l a b o u r f o r c e . WAGE2 - a r e l a t i v e measure of the wage l e v e l o f non-medical s t a f f p e r s o n n e l . " (Barer, 1977, 117) EDRAT - r e f l e c t s the share of h o s p i t a l e x p e n d i t u r e devoted t o educational a c t i v i e s . OUTXPD - r e f l e c t s t h e share o f h o s p i t a l e x p e n d i t u r e devoted t o outpatient a c t i v i t i e s . RNI - Resource Need Index - index r e f l e c t i n g the c o m p l e x i t y o f the h o s p i t a l ' s c a s e l o a d d e f i n e d i n terms o f d i a g n o s i s , age and whether the p a t i e n t r e c e i v e d an o p e r a t i o n , and measured on t h e b a s i s o f American average charge data. ALS - i s t h e average l e n g t h o f s t a y f o r a l l p a t i e n t s i n the hospital. A more d e t a i l e d d e s c r i p t i o n o f these v a r i a b l e s w i l l be p r o v i d e d i n a later  section.  Having d e f i n e d  t h i s p^ f u n c t i o n i t i s p o s s i b l e t o d e r i v e an average  c o s t p e r case e q u a t i o n ,  CASEX, by d i v i d i n g the t o t a l c o s t e q u a t i o n by the  t o t a l number o f cases. o  TC = p B + p B 1  2  + P  3  (other v a r i a b l e s ) C  now becomes CASEX =  TC  = a  2  + p B + P B  ——  —-—  9 _ -  + a CMPXC1 + a SPCLC1 + ^  1=1  .+ a. „EDRAT + a, .OUTXPD + a. ,WAGE1 + a. _WAGE2 12 13 14 15 + a,.ALS 16 and TC  CASEX = - ± = a L»  U  ?  + p B + p„B^ + a RNI + a EDRAT X  Z  X  Z.  + a^OUTXPD + a,WAGE1 + a WAGE2 + a^ALS 3 4 5 6  a  F.  80  In a s i m i l a r f a s h i o n i t i s p o s s i b l e t o d e r i v e an average c o s t p e r i n p a t i e n t day e q u a t i o n , DAYEX, by d i v i d i n g t o t a l i n p a t i e n t c o s t s by t o t a l days. Thus we d e r i v e DAYEX i n the f o l l o w i n g manner: DAYEX =  = b  Q  + q B + q B L  2  + b^MPXCl  ~D 9 + b.SPCLCl + * b.. , F. 2 i = l i+2 l ~~D~  0  + b,-EDRAT + b 0UTXPD + b-.WAGEl + b., WAGE2 12 13 14 15 lo  C  + b.-ALS 16 and TC DAYEX = — = b  Q  ? + q B + q B + bjRNI + b EDRAT 2  D  ~D  + b„0UTXPD + b.WAGEl + b WAGE2 + b A L S 3 4 5 6 r  3.2.  r  Sources o f Data 3.2.1.  Hospitals The  data f o r t h i s study a r e taken from 112 acute c a r e  hospitals i n Alberta. Alberta  T a b l e 3.1 shows the t o t a l number o f h o s p i t a l s i n  i n each s i z e c a t e g o r y .  This  t a b l e shows there  of h o s p i t a l s i n t h e 25-99 bed s i z e range. h o s p i t a l s are i n t h i s category. l a r g e s t bed s i z e c a t e g o r i e s  i s a large  number  In f a c t 68 p e r c e n t o f a l l  The seven i n s t i t u t i o n s i n the two  are a l l located  i n the two major  cities,  C a l g a r y and Edmonton. T a b l e 3.1 r e v e a l s  a t o t a l o f 124 h o s p i t a l s .  t h i s study o n l y 112 h o s p i t a l s were i n c l u d e d .  F o r the purpose of  Seven h o s p i t a l s were  excluded because d a t a e i t h e r on t h e i r e x p e n d i t u r e s o r case mix were  81  unavailable.  A f u r t h e r f i v e h o s p i t a l s were excluded because they were  a t y p i c a l and may  have u n f a i r l y b i a s e d  h o s p i t a l s i n Calgary  the r e s u l t s .  were combined and  The  data f o r  are counted as one  two  institution  as  they submit a j o i n t Annual Return. The  expenditures,  h o s p i t a l s are d e r i v e d (i)  The  f a c i l i t i e s and from two  major  p a t i e n t case mix  d a t a f o r these  sources:  h o s p i t a l annual r e t u r n .  Each h o s p i t a l i s r e q u i r e d  to  submit an annual r e t u r n to S t a t i s t i c s Canada, which c o n s i s t s of two known as the HS-1 f a c i l i t i e s and  and  the HS-2  forms.  They c o n t a i n a r e c o r d  of  parts,  the  s e r v i c e s of the h o s p i t a l as w e l l as the f i n a n c i a l  state-  ments . (ii)  The  PAS  abstract.  the P a t i e n t A c t i v i t y Michigan.  Nearly  a l l Alberta h o s p i t a l s subscribe  Study (PAS), a s e r v i c e o f f e r e d by CPHA i n Ann  This abstract records  patient morbidity  information  d e t a i l s of other p a t i e n t c h a r a c t e r i s t i c s such as age  and  sex.  Diagnosis  to the I n t e r n a t i o n a l C l a s s i f i c a t i o n of D i s e a s e s  Adapted  grouped i n t o 188  broad d i a g n o s t i c c a t e g o r i e s  purpose of i n t e r - h o s p i t a l comparisons. development of both the i n f o r m a t i o n (CMPXC1 and 3.2.2.  SPCLC1) and  the RNI  The  theory  raw  data required  case mix  come from t h i s PAS  Arbor,  and  i s coded a c c o r d i n g (ICDA) and  to  for  for  the  the  complexity v a r i a b l e s abstract.  Time P e r i o d T h i s study i s a c r o s s s e c t i o n a l a n a l y s i s of h o s p i t a l c o s t s  f o r the p e r i o d A p r i l 1978 returns.  Unfortunately  to March 1979  morbidity  using  information  d a t a from the PAS  a v a i l a b l e f o r the same time p e r i o d .  from the  a b s t r a c t s are  annual not  A l t h o u g h these d a t a are compiled  an annual b a s i s , the y e a r l y time p e r i o d i s from January to December not  from A p r i l to March.  So the case mix  complexity v a r i a b l e s  are  on  and  82  T a b l e 3.1.  H o s p i t a l and Bed D i s t r i b u t i o n , A l b e r t a ,  1979  HOSPITAL S i z e Category  No.  1000 - up  1  BEDS  Percent  No.  Percent  .81  1236  10.00  4.88  4529  36.63  500 - 999  6  300 - 499  3  2.44  1074  8.69  100 - 299  10  8.13  1583  12.80  2  50 -  99  28  22.76  1749  14.15  25 -  49  56  45.53  1869  15.12  1 -  24  19  15.45  324  2.62  100.00  12364  100.00  TOTAL  123  2  1 - Beds i n P u b l i c and F e d e r a l G e n e r a l  Hospitals.  2 - I n c l u d e s C a l g a r y Holy Cross and C a l g a r y Rockyview as one i n s t i t u t i o n because t h e i r h o s p i t a l c o s t r e p o r t i n g i s combined.  Source:  A l b e r t a H o s p i t a l s and M e d i c a l Care, H o s p i t a l Care In A l b e r t a , S t a t i s t i c a l Supplement, f o r the year ended March 31, 1979, Edmonton: H e a l t h Economics and S t a t i s t i c s Branch, June 1980.  83'  developed  from data f o r the p e r i o d , January  to December, 1978; the  e x p e n d i t u r e d a t a i s f o r the p e r i o d A p r i l 1978 to March 1979. (1977) p r o v i d e s evidence which suggests  t h a t case mix  e s t i m a t e d u s i n g i n f o r m a t i o n t h e o r y , i s extremely much l o n g e r than t h r e e months. this analysis:  Barer  c o m p l e x i t y , as  s t a b l e over p e r i o d s o f  Thus we are making two assumptions i n  ( i ) t h a t case c o m p l e x i t i e s do not v a r y s i g n i f i c a n t l y  a p e r i o d o f t h r e e months, ( i i ) t h a t an i n d i v i d u a l h o s p i t a l ' s case  over  mix  over two twelve month p e r i o d s , staggered by t h r e e months but w i t h n i n e months o v e r l a p p i n g , w i l l be e q u i v a l e n t .  3.3.  Variables In t h i s s e c t i o n each of the v a r i a b l e s i n the e q u a t i o n  in detail. (1977).  T h i s d e s c r i p t i o n i s borrowed, f o r the most p a r t , from  S i m i l a r l y the computer programs used  were developed  by Barer  make them a d a p t a b l e 3.3.1. (1)  i s described Barer  to d e r i v e these v a r i a b l e s  (1977) w i t h o n l y minor m o d i f i c a t i o n s needed t o  to 1978-79 d a t a .  Dependent V a r i a b l e s  Average c o s t per case  (CASEX)  To quote d i r e c t l y from Barer  (1977):  "CASEX i s f o r m a l l y d e f i n e d as i n p a t i e n t c o s t per h o s p i t a l s e p a r a tion. Thus i t i s t o t a l e x p e n d i t u r e on i n p a t i e n t c a r e d i v i d e d by number of s e p a r a t i o n s . From t o t a l h o s p i t a l e x p e n d i t u r e (TOTEX) as r e p o r t e d i n the HS-2 form, the f o l l o w i n g items were s u b t r a c t e d to a r r i v e a t an e s t i m a t e o f i n - p a t i e n t e x p e n d i t u r e (IPEXP): (i) (ii)  "(iii) (iv)  e x p e n d i t u r e on n u r s i n g and m e d i c a l  education;"  non-departmental expenses, which i n c l u d e r e n t on l a n d and b u i l d i n g s ? , and d e p r e c i a t i o n and i n t e r e s t on l o n g term l o a n s ^ . e x p e n d i t u r e on s p e c i a l r e s e a r c h p r o j e c t s ; share of a d m i n i s t r a t i o n expenses a l l o c a t a b l e to i n p a t i e n t c a r e (see below);  non-  (v) estimated d i r e c t o u t p a t i e n t expenses which i n c l u d e s e x p e n d i t u r e on the o r g a n i z e d o u t p a t i e n t department, o u t p a t i e n t p o r t i o n of r a d i o l o g y and l a b o r a t o r y d e p a r t ment expenses, o u t p a t i e n t share of emergency department expenses, a l l ambulance s e r v i c e expenses, o u t p a t i e n t share of o p e r a t i n g room e x p e n d i t u r e , and o u t p a t i e n t p h y s i o t h e r a p y expenses . With regard to item ( i v ) t o t a l a d m i n i s t r a t i v e expenses were i n i t i a l l y s u b t r a c t e d , a f t e r which the f o l l o w i n g adjustment was undertaken to add back the i n p a t i e n t share of a d m i n i s t r a t i o n services: Let IP = TOTEX - (items ( i ) , ( i i ) , ( i i i ) & (v) above, p l u s t o t a l a d m i n i s t r a t i o n expenses (ADMIN)). Thus, the i n i t i a l d e l e t i o n of n o n - i n p a t i e n t expenses i n c l u d e s the e n t i r e a d m i n i s t r a t i v e e x p e n d i t u r e component. Now, i f we denote the i n p a t i e n t share o f a d m i n i s t r a t i o n by IPADMIN, and items ( i ) , ( i i ) , ( i i i ) and (v) t o g e t h e r , by NONIP, i t f o l l o w s that ADMIN = TOTEX - IP - NONIP. I f we then,presume'that a d m i n i s t r a t i v e a c t i v i t y according  IPADMIN =  =  ADMIN •  i s allocated  IP IP+NONIP  ADMIN • IP (TOTEX-ADMIN)  Adding t h i s back to IP, we a r r i v e a t IPEXP = IP + IP ADMIN,. = total inpatient  expenditure.  Thus, the i n p a t i e n t share of t o t a l n o n - a d m i n i s t r a t i v e expenses was used as the i n p a t i e n t weight on a d m i n i s t r a t i o n expenses. Then, CASEX = IPEXP/SEPNS (SEPNS = number of s e p a r a t i o n s ) " (Barer, 1977, 129-131)  85  (2)  Average c o s t per day (DAYEX)  DAYEX i s f o r m a l l y d e f i n e d as i n p a t i e n t c o s t p e r h o s p i t a l day. Thus i t i s t o t a l expenditure number o f p a t i e n t days."^  on i n p a t i e n t care d i v i d e d by the t o t a l  (See p r e v i o u s  d i s c u s s i o n o f CASEX f o r an  e x p l a n a t i o n o f the method o f e s t i m a t i n g i n p a t i e n t 3.3.2. (i)  expenditure.)  Independent V a r i a b l e s  Size/Capacity  (INVCFR, BDCFR, INVDFR, BDDFR)  In the o r i g i n a l Evans-Walker (1972) e q u a t i o n  the v a r i a b l e CFR  (case flow r a t e ) i s used as a measure f o r the number o f cases p e r bed Q  per year  (cases d i v i d e d by beds, —) . CFR =  f  In the CASEX e q u a t i o n ,  defined e a r l i e r i n t h i s chapter,  there are  two  v a r i a b l e s which express t h i s same s i z e r e l a t i o n s h i p — b e d s d i v i d e d B B by cases ( — ) and beds squared d i v i d e d by cases ( — ) . The v a r i a b l e , 2  B 1 — , i s the CFR v a r i a b l e i n v e r t e d , ( — )• C „ CrR n o t a t i o n , INVCFR.  T h i s v a r i a b l e i s g i v e n the  S i m i l a r l y , — i s B*INVCFR, and i s g i v e n the n o t a t i o n ,  BDCFR. B In the DAYEX e q u a t i o n ,  B  2  the v a r i a b l e s — and —  a r e g i v e n the  n o t a t i o n INVDFR, BDDFR r e s p e c t i v e l y , (ii)  Case mix  complexity  CMPXC1 The  v a r i a b l e , CMPXC1, i s d e r i v e d from i n f o r m a t i o n theory and  i s the same v a r i a b l e used by Evans and Walker (1972) and Barer  (1977).  The mathematical f o r m u l a t i o n o f t h i s measure i s d e s c r i b e d i n d e t a i l by Evans and Walker (1972), Walker (1976), Barer  (1977) and Horn and  Schumacher (1979), so i t w i l l not be repeated  here.  complexity  "Basically, hospital  (CMPXC1) i s a weighted sum o f the ( s t a n d a r d i z e d )  complexities  86  of  cases t r e a t e d i n the h o s p i t a l , the weights b e i n g the p r o p o r t i o n of  t o t a l case l o a d f a l l i n g w i t h i n each case c a t e g o r y " ( B a r e r , 1977, 132). The v a l u e f o r each case type i s d e r i v e d from the a p p l i c a t i o n of i n f o r m a t i o n t h e o r y and i s a f u n c t i o n o f the r e l a t i v e c o n c e n t r a t i o n o f each type throughout  the h o s p i t a l system.  case  The case type c l a s s i f i c a t i o n i s  the 188 d i a g n o s t i c c a t e g o r y m a t r i x o f the Canadian H o s p i t a l M o r b i d i t y List.  The i n d i v i d u a l h o s p i t a l v a l u e s can be seen i n Appendix 3.1,  T a b l e 3.3. SPCLC1 I n f o r m a t i o n t h e o r y can be used to develop a measure o f the s p e c i a l i z a t i o n o f the h o s p i t a l .  T h i s r e f e r s t o t h e range o f d i f f e r e n t  case types t r e a t e d by the h o s p i t a l .  Thus a s m a l l h o s p i t a l , w i t h a  r e l a t i v e l y s m a l l c a s e l o a d , w i l l p r o b a b l y be h i g h l y s p e c i a l i z e d the v a r i e t y o f i t s case types w i l l n o t be v e r y g r e a t .  because  On the o t h e r hand,  a l a r g e h o s p i t a l , which admits many complex case types w i l l n o t be as s p e c i a l i z e d because greater.  the range o f d i f f e r e n t types o f cases w i l l be much  The base f o r d e v e l o p i n g t h i s measure i s the p r o v i n c i a l  distribution.  The degree  case  t o which each h o s p i t a l ' s case mix p r o p o r t i o n s  d e v i a t e s from the p r o v i n c i a l p r o p o r t i o n s , the l a r g e r the i n f o r m a t i o n g a i n and t h e g r e a t e r the value of the h o s p i t a l ' s s p e c i a l i z a t i o n measure. The  i n d i v i d u a l h o s p i t a l s p e c i a l i z a t i o n v a l u e s , SPCLC1, a r e c o n t a i n e d i n  Appendix 3.1, T a b l e 3 . 3 . ^ RNI The development o f the Resource Need Index has been d e s c r i b e d i n d e t a i l i n Chapter 2.  B r i e f l y the index i s a measure of the c o m p l e x i t y of  the h o s p i t a l ' s c a s e l o a d .  Complexity  i s d e f i n e d as the r e l a t i v e  " e x p e n s i v e n e s s " o f each case type, measured i n terms o f the average  87  charges  f o r those case types i n U.S.  hospitals.  An index i s produced  f o r each h o s p i t a l by a s s i g n i n g a r e l a t i v e v a l u e to each case  category,  then d e t e r m i n i n g the p r o p o r t i o n of the h o s p i t a l ' s c a s e l o a d i n each c a t e g o r y and summing a c r o s s a l l c a t e g o r i e s . The v a l u e of the index f o r each h o s p i t a l i s p r o v i d e d i n Appendix 3.1,  Table (iii)  3.3. Age-sex f a c t o r s c o r e s (F , F^,  F^,  F^,  F  , F^  Both d i a g n o s i s and age o f - p a t i e n t are accounted t i o n of the RNI. complexity  F^,  on d i a g n o s i s i n f o r m a t i o n o n l y .  i n t u i t i v e l y p l a u s i b l e t h a t both' age and  F )  g  g  f o r i n the c o n s t r u c -  However, the i n f o r m a t i o n theory measure of  i s based  F ,  case  Since i t i s  sex c o u l d i n f l u e n c e v a r i a t i o n  i n c o s t per case, age-sex f a c t o r s c o r e s are developed  t o be used  as  a d d i t i o n a l v a r i a b l e s i n . t h e e q u a t i o n u s i n g CMPXC1 as the measure of  case  mix. The d e s c r i p t i o n of the c o n s t r u c t i o n of these v a r i a b l e s i s taken almost  d i r e c t l y from Barer  "The  first  (1977):  stage i n c o n s t r u c t i n g age/sex s t a n d a r d i z a t i o n v a r i -  a b l e s i n v o l v e d d i s a g g r e g a t i n g the i n p a t i e n t s e p a r a t i o n s i n t o an age-sex g r i d based  on age  a t the date of  admission.  T h i s m a t r i x c o n t a i n e d 40 columns (one row follows  .,,12 Column 1  male  newborn  2  "  under 1 year  3  "  1-4  years  4  "  5-9  years  5  "  10-14  years  per h o s p i t a l ) as  male  15-19 y e a r s  7  "  20-24 y e a r s  8  "  25-29 y e a r s  9  "  30-34 y e a r s  10  "  35-39 y e a r s  11  "  40-44 y e a r s  12  "  45-49 y e a r s  13  "  50-54 y e a r s  14  "  55-59 y e a r s  15  "  60-64 y e a r s  16  "  65-69 y e a r s  17  "  70-74 y e a r s  18  "  75-79 y e a r s  19  "  80-84 y e a r s  20  "  85+  Column 6  21  female  years  newborn  22  "  under 1 y e a r  23  "  1- 4 y e a r s  24  "  5- 9 y e a r s  25  "  10-14 y e a r s  26  "  15-19 y e a r s  27  "  20-24 y e a r s  28  "  25-29 y e a r s  29  "  30-34 y e a r s  30  "  35-39 y e a r s  31  »  40-44 y e a r s  32  "  45-49 y e a r s  Column 33 34 35  The  female  50-54 y e a r s  "  55-59 y e a r s 60-64 y e a r s  11  36  "  65-69 y e a r s  37  "  70-74 y e a r s  38  "  75-79 y e a r s  39  "  80-84 years  40  "  85+  age-sex m a t r i x was  years  then s t a n d a r d i z e d , by row,  through con-  v e r s i o n of the a c t u a l numbers to p r o p o r t i o n s of the t o t a l c a s e l o a d f o r each h o s p i t a l , so t h a t each row  summed to  one.  "A f a c t o r a n a l y s i s of the 40 s t a n d a r d i z e d case p r o p o r t i o n v e c t o r s was  then employed to d e r i v e age/sex f a c t o r s c o r e s .  were d e r i v e d . . .  by  In p a r t i c u l a r , f a c t o r s  the p r i n c i p a l component method.  then r o t a t e d u s i n g the varimax procedure and through r e g r e s s i o n a n a l y s i s .  The  f a c t o r s were  f a c t o r s c o r e s were computed  I t i s these f a c t o r s c o r e s which were  employed as independent v a r i a b l e s i n our a n a l y s i s " (Barer, 1977,  then  142-143).  P r i n c i p a l components a n a l y s i s i s used i n t h i s s i t u a t i o n because the aim  i s to reduce the f o r t y age-sex v a r i a b l e s i n t o a reduced  set,  w h i l e s t i l l m a i n t a i n i n g most of the o r i g i n a l v a r i a n c e t h a t e x i s t s i n the raw  data.  P r i n c i p a l components a n a l y s i s does t h i s by c a p t u r i n g  u n d e r l y i n g r e l a t i o n s h i p s w i t h i n the data and  r e d u c i n g them to a s m a l l e r  set of f a c t o r s or components t h a t are o r t h o g o n a l other.  The  the  ( u n c o r r e l a t e d ) to each  a c t u a l number of components depends upon the degree of  c o r r e l a t i o n among the o r i g i n a l v a r i a b l e s — t h e h i g h e r the  correlation,  the s m a l l e r the number of f a c t o r s r e q u i r e d to r e p r e s e n t the o r i g i n a l  data.  Each component i s a l i n e a r composite of the f o r t y o r i g i n a l v a r i a b l e s , w i t h the f i r s t p r i n c i p a l component a c c o u n t i n g  f o r more of the v a r i a n c e  90  i n the d a t a as a whole than any other l i n e a r combination (Nie e t a l . , 1975, 470). assessed by d e t e r m i n i n g i s accounted  of v a r i a b l e s  The importance o f a g i v e n f a c t o r can be  the amount o f t o t a l v a r i a n c e i n the data t h a t  f o r by t h i s f a c t o r .  T h i s r e q u i r e s examining the e i g e n v a l u e  of the f a c t o r and i t s c o r r e s p o n d i n g p r o p o r t i o n of the sum o f e i g e n v a l u e s . The  SPSS package program f o r f a c t o r a n a l y s i s was the one used h e r e .  T a b l e 3.2 shows the e i g e n v a l u e s of the f a c t o r s and p e r c e n t o f v a r i a n c e e x p l a i n e d by these f a c t o r s . comprised  approximately  A d e c i s i o n was made t o use 9 f a c t o r s as they  80 p e r c e n t o f the t o t a l accumulated e i g e n v a l u e s .  T h i s c u t - o f f p o i n t o f 80 p e r c e n t was chosen on the b a s i s o f B a r e r ' s rationale—that  these n i n e f a c t o r s accounted  f o r 80 p e r c e n t o f the  v a r i a n c e and an a d d i t i o n a l t h r e e f a c t o r s would o n l y add a s m a l l amount (5 p e r c e n t ) t o t h i s v a r i a n c e t o t a l  T a b l e 3.2.  Factor  ( B a r e r , 1977, 146).  E i g e n v a l u e of Age-Sex F a c t o r  Eigenvalue'  ""  13  Scores  Cumulative P e r c e n t of Variance  1  11.28764  28.2  2  7.16529  46.1  3  3.68176  55.3  4  2.85209  62.5  5  2.26936  68.1  6  1.57585  72.1  7  1.19693  75.1  8  1.15347  78.0  9  0.98663  80.4  10  0.71369  82.2  11  0.64812  83.8  12  0.57442  85.3  (iv)  E d u c a t i o n expenses (EDRAT) and o u t p a t i e n t  Each v a r i a b l e i s a measure o f the p r o p o r t i o n a l l o c a t e d to t h i s function. nursing  laboratory  of t o t a l costs  (TOTEX)  EDRAT i n c l u d e s a l l e x p e n d i t u r e s on  and m e d i c a l e d u c a t i o n .  organized outpatient  expenses (OUTXPD).  OUTXPD i n c l u d e s  department, o u t p a t i e n t  department expenses, o u t p a t i e n t  e x p e n d i t u r e on the  p o r t i o n o f r a d i o l o g y and share o f emergency department  expenses, a l l ambulance s e r v i c e expenses, o u t p a t i e n t room e x p e n d i t u r e , and o u t p a t i e n t  share o f o p e r a t i n g  p h y s i o t h e r a p y expenses.  These two v a r i a b l e s a r e i n c l u d e d  i n the r e g r e s s i o n  equation  p r i m a r i l y to t e s t f o r i n d i r e c t e f f e c t s o f e d u c a t i o n and o u t p a t i e n t expenses on i n p a t i e n t s (v)  costs.  Wage l e v e l s (WAGE1, WAGE2)  Barer  (1977) extended the o r i g i n a l Evans-Walker (1972) model to  i n c l u d e two v a r i a b l e s t h a t r e f l e c t e d h o s p i t a l wage l e v e l s : "(i)  WAGE1 - an i n d i c a t o r o f the e x t e n t to which a h o s p i t a l has a  r e l a t i v e l y c o s t l y s e r v i c e , o r s k i l l , mix. i n d i c a t e t h a t the h o s p i t a l i n q u e s t i o n  A value greater  than 1 would  employs p e r s o n n e l i n a more  c o s t l y combination than the p r o v i n c i a l average. (ii)  WAGE2 - an i n d i c a t o r o f the e x t e n t to which h o s p i t a l j i s a  r e l a t i v e l y h i g h wage hospital.'. The  1  (Barer,  1977, 148)  method o f d e r i v i n g these v a r i a b l e s i s a l s o taken d i r e c t l y  B a r e r (1977).  The r e l e v a n t  " H o s p i t a l support into eight  sectors:  from  s e c t i o n i s reproduced as f o l l o w s :  (non-medical s t a f f ) p e r s o n n e l were p a r t i t i o n e d  92  (1  nursing  administration  (2  short-term & long-term u n i t s f o r adults & c h i l d r e n  (3  other nursing  (4  library  administration  (5  general  administration  (6  laboratory  (7  d i a g n o s t i c and t h e r a p e u t i c  (8  other s p e c i a l services  care  radiology  Data p e r t a i n i n g t o t o t a l hours of work f o r each s e c t o r , and t o t a l wage b i l l tapes.  a l l o c a t e d t o each s e c t o r were o b t a i n e d from the HS-1 and HS-2  The f o l l o w i n g n o t a t i o n  i s used i n the c o n s t r u c t i o n o f these two  variables. W  = average wage i n s e c t o r i ( i = 1, . . . .8, above), and h o s p i t a l j ( j = 1  87)  [ f o r A l b e r t a , h o s p i t a l j ( j = 1, . . . .112)] H_  = no. o f l a b o u r hours i n s e c t o r i , h o s p i t a l j .  T h i s b a s i c n o t a t i o n g i v e s r i s e t o the f o l l o w i n g d e r i v a t i v e v a r i a b l e s : B. = £;W.. H.. = h o s p i t a l i wage 3 i ij i j B. = £.W. . H. .  i i]  3  bill  t o t a l p r o v i n c i a l s e c t o r i wage t o t a l h o s p i t a l j hours  H. = •S.H. . i 3i j  t o t a l p r o v i n c i a l s e c t o r i hours  H  t o t a l p r o v i n c i a l hours  =«.H..  W. = l  B./H. i i  W. = 3  B./H. .3 3  bill  p r o v i n c i a l average s e c t o r i wage r a t e average wage r a t e , h o s p i t a l j  (continued)  93  IL =  H^/H  IL =  **T/  = sector  o f t o t a l p r o v i n c i a l hours  hospital j proportion  =  H  i proportion  o f t o t a l p r o v i n c i a l hours  PTP..=  H../H.  = hospital j proportion s e c t o r x hours  PTH..= ij  H../H.  = sector  13 3  The c o n s t r u c t i o n  i proportion  of t o t a l h o s p i t a l j hours  o f each i s d e t a i l e d below.  r e l a t i v e l y c o s t l y s k i l l mix as d e f i n e d bill,  of t o t a l p r o v i n c i a l  I f h o s p i t a l j has a  above, we would a n t i c i p a t e a wage  f o r that h o s p i t a l , g r e a t e r than a wage b i l l  c o n s t r u c t e d by u s i n g  h o s p i t a l j wage r a t e s , but p r o v i n c i a l s k i l l mix p r o p o r t i o n s .  Thus,  WAGE1. = B./H. • S.W..H. = W./ ^ W..H. 3 3 3 1 1 3 1 j x 13 1 T h i s measure w i l l be upward b i a s e d f o r any h o s p i t a l h a v i n g one o r more s e c t o r s structed  i n which i t employs no one, as t h e denominator i s con-  from p r o v i n c i a l s k i l l p r o p o r t i o n s ,  s e c t o r wage r a t e s . H. x  =  but i n d i v i d u a l h o s p i t a l  By computing H_^, f o r each h o s p i t a l , as  H. .,_ x • IND. <i i i T  1  where IND. =  ( 1 i f W.. ± 0  0 i f W.. - 0 13 we circumvented i n t r o d u c t i o n sector  of t h i s bias.  Thus i f W_  hours were excluded i n computing p r o v i n c i a l  = 0,  th the i  proportions.  If h o s p i t a l j has a r e l a t i v e l y h i g h wage l e v e l , t h i s would become apparent through a measure c o n s t r u c t e d from a numerator o f h o s p i t a l j ' s wage b i l l ,  and a denominator of p r o v i n c i a l s e c t o r wage l e v e l s weighted  by h o s p i t a l j ' s s k i l l mix.  Thus  WAGE 2. = B./2.W.H.. = W./*W. • PTH..  3  J  u  l  ] 3 1 1  13  94-  In t h i s case, t h e r e a r e no z e r o - v a l u e d i f f i c u l t i e s , l e v e l s a r e employed i n the denominator."  (Barer,  as p r o v i n c i a l wage  1977, 147-9)  Appendix 3.1, T a b l e 3.3 p r o v i d e s v a l u e s f o r these v a r i a b l e s  for a l l  hospitals. (vi)  Average l e n g t h  The  o f s t a y (ALS)  ALS v a r i a b l e measures the average l e n g t h  s e p a r a t e d i n the g i v e n y e a r .  From the HS-1 form, d a t a on t o t a l  days o f a l l cases ( a d u l t s , c h i l d r e n )  t o t a l inpatient separations  average l e n g t h  of s t a y  (for adults,  3.4.  Regression  figure.  children)  f i g u r e f o r each h o s p i t a l .  T a b l e 3.3 f o r h o s p i t a l average l e n g t h  hospital  s e p a r a t e d from the h o s p i t a l were  aggregated t o form a t o t a l s e p a r a t e d days s t a y by  of stay of a l l p a t i e n t s  T h i s was d i v i d e d t o a r r i v e a t an  See Appendix 3.2,  of stay.  Analysis  Having o u t l i n e d  the t h e o r e t i c a l s p e c i f i c a t i o n o f the b e h a v i o u r a l  h o s p i t a l e q u a t i o n the next step i s t o t e s t the r e l a t i o n s h i p o f the independent v a r i a b l e s  (x^, x^, x^ . . . .x^) t o the dependent  (CASEX and DAYEX), t h a t  i s , t o examine the e x t e n t t o which these  pendent v a r i a b l e s e x p l a i n regression  variables  the dependent v a r i a b l e s .  This  i s done  indeusing  analysis.  More s p e c i f i c a l l y , we w i s h : (i)  to q u a n t i f y  2 (—,—,— \J  age  L»  U  the r e l a t i o n s h i p between the s i z e  B and — ) , case v a r i a b l e s  variables  2  (case mix c o m p l e x i t y , s p e c i a l i z a t i o n ,  U  and sex, average l e n g t h o f s t a y ) , e d u c a t i o n expense v a r i a b l e ,  patient  out-  expense v a r i a b l e and wage l e v e l v a r i a b l e s , to the two dependent  v a r i a b l e s , average c o s t p e r case (CASEX) and average i n p a t i e n t per day (DAYEX).  expense  95  (ii)  to determine which of the s e v e r a l independent v a r i a b l e s  important, e s p e c i a l l y the case c o m p l e x i t y v a r i a b l e s d e s c r i b i n g or p r e d i c t i n g the dependent v a r i a b l e s In o r d i n a r y  l e a s t squares r e g r e s s i o n  dependent v a r i a b l e s are p r e d i c t e d .1 Y = A + B,X, where Y"*" r e p r e s e n t s the  (CMPXC1, RNI),  (CASEX and  the  from a l i n e a r f u n c t i o n of the  + B„X„ +  +  coefficients.  The  for  DAYEX).  a n a l y s i s , v a l u e s of  form:  B  the e s t i m a t e d v a l u e f o r Y,  are r e g r e s s i o n  are  A and  A i s the Y i n t e r c e p t ,  and  c o e f f i c i e n t s are 1 2  s e l e c t e d i n such a way minimized.  The  smaller  t h a t the sum  of squared r e s i d u a l s  the d e v i a t i o n s  (Y - Y )  is  of the observed v a l u e s from t h i s  line  (and consequently the s m a l l e r the sum of squares of these d e v i a ' 14 t i o n s ) , the c l o s e r the best f i t t i n g l i n e w i l l be to the d a t a . In the next c h a p t e r , the r e g r e s s i o n models w i l l be  r e s u l t s p r o v i d e d , from which c o n c l u s i o n s appropriate hospital  can be  tested,  and  drawn about the most  case complexity v a r i a b l e s to be used i n the p r e d i c t i o n of  costs.  96  Reference Notes, Chapter 3  1.  The d e s c r i p t i o n of the h o s p i t a l c o s t e q u a t i o n and the v a r i a b l e s used here are borrowed d i r e c t l y from the p r e v i o u s work of these a u t h o r s . S i m i l a r l y the computer programs needed to d e r i v e these e q u a t i o n s were a l s o borrowed from t h i s same s o u r c e . I am g r e a t l y i n d e b t e d to both Robert Evans and M o r r i s Barer f o r p r o v i d i n g t h i s t e c h n i c a l a s s i s t a n c e and e l i m i n a t i n g what would have o t h e r w i s e been a v e r y time consuming task.  2.  These d e p r e c i a t i o n c o s t s were excluded from the a n a l y s i s because the d a t a base which r e c o r d s t h i s e x p e n d i t u r e does not r e p o r t a c t u a l d e p r e c i a t i o n c o s t s , but r a t h e r f i n a n c i n g c o s t s . The r e l a t i o n s h i p between these two c o s t s i s u n c e r t a i n , so the d e c i s i o n was made t o exclude them.  3.  The l a t t e r two v a r i a b l e s d e s c r i b e d here were developed by B a r e r (1977) and were not i n c l u d e d i n the Evans and Walker (1972) model.  4.  Both Evans and Walker (1972) and Barer (1977) i n c l u d e d a t h i r d v a r i a b l e — n a m e l y d e p r e c i a t i o n expenses. However, the suspect n a t u r e of the data a v a i l a b l e to develop t h i s v a r i a b l e , and i t s r e l a t i v e l y i n s i g n i f i c a n t p r e d i c t i v e power, l e a d to i t s e x c l u s i o n from the A l b e r t a model.  5.  The data were u n a v a i l a b l e because these seven h o s p i t a l s are F e d e r a l h o s p i t a l s and e x p e n d i t u r e and f a c i l i t i e s d a t a were not r e a d i l y a v a i l a b l e at the p r o v i n c i a l l e v e l .  6.  These h o s p i t a l s were a t y p i c a l because, i n f o u r cases, they had u n u s u a l l y l o n g l e n g t h s of s t a y . In the f i f t h c a s e , the h o s p i t a l was a s p e c i a l i z e d c h i l d r e n ' s h o s p i t a l . In the f i r s t s e r i e s of r e g r e s s i o n e q u a t i o n s , these h o s p i t a l s were i n c l u d e d but they u n f a i r l y b i a s e d the r e s u l t s a g a i n s t the RNI, c a u s i n g i t to have an insignificant r e g r e s s i o n c o e f f i c i e n t i n some e q u a t i o n s .  7.  See  HS-1,  p.  13.  8.  See  HS-2,  p.  52.  9.  The HS-1 and HS-2 forms do not p r o v i d e a breakdown of the i n p a t i e n t and o u t p a t i e n t shares of r a d i o l o g y and l a b o r a t o r y department expenses, emergency s e r v i c e s , e t c . T h i s was e s t i m a t e d on the b a s i s of the r e l a t i v e p r o p o r t i o n of i n p a t i e n t and o u t p a t i e n t a c t i v i t y . The method of a l l o c a t i o n was the same as t h a t used by Barer (1977). For d e t a i l s , the i n t e r e s t e d reader should c o n t a c t the author.  97  10.  I t i s n o t p r e c i s e l y t r u e t h a t DAYEX i s GASEX d i v i d e d by ALS, s i n c e t o t a l cases r e f e r s to s e p a r a t i o n s w i t h i n the s p e c i f i e d time p e r i o d ( i . e . the y e a r ) w h i l e t o t a l p a t i e n t days i n c l u d e s a l l p a t i e n t days i n the year p e r i o d . I f a p a t i e n t i s admitted b e f o r e the end o f the y e a r and s e p a r a t e d i n the new y e a r , the p a t i e n t days w i l l be d i s t r i b u t e d between the two ^.calendar y e a r s f o r the purpose o f c a l c u l a t i n g t o t a l p a t i e n t days. e.g. i f p a t i e n t A a r r i v e d December 20 1981 and l e a v e s January 20 1982, she counts as one case and 20 days i n 1982 and 11 days and no case i n 1981. Similarly, someone who s t a y e d throughout a f u l l y e a r would generate 365 (or 366)days i n t h a t y e a r , but no s e p a r a t i o n s .  11.  In Chapter 2, f o o t n o t e 19, two o t h e r s p e c i a l i z a t i o n v a r i a b l e s were described. As they a r e a l t e r n a t i v e measures, o n l y one measure, SPCLC1, was chosen f o r i n c l u s i o n i n the a n a l y s i s .  12.  D i r e c t q u o t a t i o n i s i n t e r r u p t e d here because columns i s d i f f e r e n t .  13.  In B a r e r ' s a n a l y s i s , s i x f a c t o r s , not n i n e , accounted f o r 80 p e r c e n t of the t o t a l v a r i a n c e .  14.  For a much more d e t a i l e d e x p o s i t i o n o f r e g r e s s i o n a n a l y s i s see Draper and Smith (1966), Neter and Wasserman (1974), Kleinbaum and Kupper (1978).  the o r d e r o f the  APPENDIX 3.1 T a b l e 3.3.  HOSPITAL NO.  Values f o r Most of the Independent V a r i a b l e s and the Two Dependent V a r i a b l e s (CASEX and DAYEX) Used i n the R e g r e s s i o n A n a l y s i s BEDS  ALS  OCC  CASEX  . DAYEX  CMPXC1  SPCLC1  1  45  5.8  .606  534.14  2  46  5.7  .448  888.33  3  80  8.3  .821  745.09  91.48  0.81  1.41  0.78  161.75  0.86  1.28  0.85  0.56  0.84  4  30  8.1  .605  875.22  106.08  0.83  1.56  0.85  5  30  6.7  .492  637.35  111.25  0.83  1.29  0.72  6  30  6.0  .573  742.23  124.51  0.81  1.86  0.72  7  16  8.2  .661  773.84  77.61  0.71  2.90  0.79  8  21  6.9  .712  586.34  88.05  0.74  2.45  0.78  9  60  10.2  .672  1010.39  102.73  0.86  0.91  0.86  10  52  6.2  .739  530.17  84.57  0.75  1.80  0.77  11  39  17'. 7  .798  956.87  61.92  0.83  1.45  0.85  12  30  9.9  .488  969.10  99.78  0.65  4.48  0.80  13  30  9.6  .282  1757.10  160.77  0.72  3.76  0.93  14  65  6.4  .606  768.52  116.26  0.91  0.67  0.79  15  784  9.3  .795  1383.79  147.25  1.13  0.55  1.07  16  928  9.4  .747  1306.55  139.62  1.10  0.36  0.97  17  726  7.1  .801  1030.70  142.90  1.07  0, 30 ;  0.98  18  117  6.8  .663  631.58  89.56  0,92  0.53  0.89  19  20  5.4  .615  543.96  101.18  0.78  1.80  0.82  20  61  7.1  .802  641.06  79.14  0.92  0.68  0.75  79.70 •  ' 0.89  RNI  HOSPITAL NO.  BEDS  ALS  OCC  CASEX  DAYEX  CMPXC1  SPCLC1  21  30  6.5  .549  693.97  22  47  6.9  .515  23  25  4.9  24  27  25  RNI  106.36  0.76  2.20  0.85  687.28  105.09  0.86  1.05  0.89  .430  495.78  101.89  0.90  1.77  0.83  4.4  .781  399.17  91.94  0.78  1.93  0.72  22  5.3  .333  697.83  128.07  0.73.  2.61  0.89  26  25  5.8  .524  778.24  124.23  0.77  2.10  0.77  27  30  6.5  .823  484.60  77.10  0.86  1.17  0.78  28  34  5.6  .716  524.10  91.39  0.82  1.03  0.87  29  47  6.8  .820  465.02  70.38  0.86  0.93  0.70  30  70  7.1  .657  845.07  121.76  0.92  0.53  0.85  31  26  8.0  .585  723.34  108.37  0.83  1.70  0.90  32  76  8.8  .797  2970.52  338.59  1.75  14.53  1.38  33  559  8.7  .841  1050.64  120.03  1.05  0.34  1.02  34  555  8.2  .839  989.46  120.11  1.02  0.22  0.89  35  977  7.5  .901  967.29  127.74  1.12  0.40  0.89  36  1236  11.4  .749  1769.82  158.26  1.17  0.68  1.16  37  50  6.4  .563  502.16  77.96  0.81  1.38  0.74  38  42  7.5  .676  771.04  107.15  0.76  1.59  0.70  39  50  4.9  .622  593.89  120.20  0.84  0.80  0.82  40  32  5.7  .693  575.79  103.40  0.83  1.01  0.82  41  73  4.6  .985  572.01  125.55  0.88  0.94  0.64  42  42  6.8  .700  575.49  103.88  0.87  0.93  0.72  43  36  5.1  .551  584.22  113.97  0.76  2.04  0.66  44  40  9.7  .491  985.49  90.38  0.69  3.56  0.82  HOSPITAL NO.  BEDS  ALS  OCC  CASEX  DAYEX  CMPXC1  SPCLC1  RNI  45  8  10.4  .835  1472.68  92.42  0.72  4.80  0.94  46  34  4.8  .505  476.16  98.00  0.84  1.19  0.65  47  130  6.0  .859  734.53  122.67  0.93  0.45  0.80  48  50  8.5  .579  895.44  95.94  0.91  1.02  0.85  49  20  8.9  .627  693.61  86.85  0.72  3.15  0.83  50  25  4.4  .674  551.15  121.36  0.82  1.80  0.65  51  72  6.5  .722  764.78  116.25  0.81  1.33  0.77  52  64  6.3  .726  663.37  106.76  0.82  0.94  0.80  53  27  4.9  .645  745.08  151.76  0.99  1.07  0.67  54  10  9.3  .685  1214.81  129.74  0.72  3.57  0.83  55  55  4.6  .677  414.26  90.78  0.87  0.89  0.76  56  28  13.6  .723  1159.08  79.69  0.84  2.16  0.96  57  33  4.5  .447  807.86  175.46  0.85  1.37  0.85  58  30  7.9  .733  852.34  110.50  0.70  2.54  0.83  59  68  6.3  .668  573.61  88.40  0.71  2.06  0.72  60  50  7.7  .649  563.53  74.07  0.86  0.93  0.82  61  72  14.2  .580  1730.43  91.43  0.89  1.46  0.99  62  35  5.0  .728  505.09  101.18  0.86  0.81  0.76  63  206  7.5  .913  708.49  95.43  1.06  0.57  0.87  64  207  7.4  .792  773.92  105.21  1.03  0.66  0.94  65  26  7.2  .671  453.44  65.32  0.87  1.45  0.74  66  34  9.8  .470  1119.94  114.88  0.79  2.13  0.85  67  30  13.8  .557  1660.17  129.23  0.80  2.34  0.84  68  22  5.9  .454  728.35  127.56  0.73  2.77  0.93  HOSPITAL NO.  BEDS  ALS  OCC  CASEX  DAYEX  CMPXC1  SPCLC1  RNI  69  61  8.6  .680  782.06  93.21  0.75  1.80  0.77  70  237  6.2  .803  648.88  103.82  1.00  0.30  0.85  71  30  4.7  .183  975.34  215.50  0.78  2.54  0.97  72  18  8.8  .661  927.37  80.99  0.79  4.68  1.06  73  20  12.8  .767  964.38  74.74  0.74  3.17  0.97  74  43  5.7  .705  475.89  82.98  0.87  1.01  0.83  75  31  10.6  .743  827.80  67.52  0.77  1.77  0.73  76  71  5.2  .620  802.29  154.17  0.93  0.58  0.73  77  25  5.7  .595  451.30  76.20  0.83  1.62  0.81  78  56  6.8  .557  770.95  103.82  0.84  0.94  0.78  79  50  5.3  .759  405.59  73.59  0.87  1.30  0.83  80  31  6.2  .642  724.43  115.17  0.86  0.95  0.83  81  25  6.5  .720  530.81  78.85  0.86  1.36  0.79  82  223  7.2  .890  993.74  137.78  1.02  0.89  0.88  83  32  6.7  .789  503.43  76.02  0.71  1.12  0.91  84  31  7.7  .669  624.25  86.81  0.84  1.06  0.87  85  47  5.4  .703  520.09  87.25  0.82  0.86  0.72  86  34  4.2  .793  346.93  84.34  0.80  1.00  0.67  87  25  7.1  .559  850.73  118.70  0.81  3.39  0.92  88  47  6.4  .518  792.36  108.40  0.88  1.15  0.90  89  100  6.0  .751  650.11  109.91  0.94  0.57  0.82  90  75  6.6  .699  646.54  90.34  0.81  1.09  0.74  91  50  6.4  .732  572.69  96.69  0.88  0.70  0.84  92  30  6.5  .434  708.91  118.25  0.87  1.73  0.70  HOSPITAL NO.  BEDS  ALS  OCC  CASEX  DAYEX  CMPXC1  SPCLC1  RNI  93  34  5.9  .524  525.35  92.49  0.80  1.59  0.84  94  66  8.1  .705  826.19  101.32  0.88  0.75  0.80  95  21  9.4  .547  774.29  111.56  0.77  2.35  0.77  96  31  6.6  .713  545.52  82.59  0.78  1.54  0.86  97  30  8.7  .756  1465.13  67.24  0.69  3.54  1.01  98  24  6.1  .529  668.07  105.62  0.74  2.34  0.90  99  37  7.9  .693  547.79  73.09  0.75  2.46  0.85  100  35  4.5  .824  487.41  81.14  0.73  2.40  0.69  101  70  7.4  .635  700.14  95.11  0.81  1.08  0.90  102  52  11.7  .599  999.69  90.97  0.89  0.93  0.87  103  35  7.1  .642  695.01  99.93  0.81  1.40  0.87  104  14  10.7  .705  930.82  96.31  0.71  4.79  0.80  105  37  6.9  .580  516.46  79.05  0.75  2.74  0.85  106  48  8.7  .706  844.13  101.16  0.87  0.81  0.83  107  80  6.1  .591  600.68  99.70  0.84  0.83  0.88  108  135  8.4  .907  754.94  92.16  0.84  0.82  0.78  109  34  4.9  .715  562.31  114.44  0.87  1.01  0.65  110  25  7.1  .518  569.21  79.53  0.72  1.11  0.98  111  29  7.0  .478  859.92  119.08  0.69  4.68  0.79  112  365  10.6  .603  1110.60  123.93  1.07  0.62  0.85  103  Chapter 4. Empirical  The  Results  purpose o f t h i s c h a p t e r i s to examine the r e s u l t s o f the r e g r e s s i o n  a n a l y s i s and a s s e s s the e x p l a n a t o r y power o f the b e h a v i o u r a l c o s t  equation  developed i n Chapter 3. To  r e i t e r a t e b r i e f l y , t h i s b e h a v i o u r a l c o s t e q u a t i o n c o n s i s t s o f two  c o m p o n e n t s — a f i x e d (per bed) and a v a r i a b l e  (per case) component.  Thus,  t o t a l h o s p i t a l c o s t s and average h o s p i t a l c o s t s a r e a f u n c t i o n o f s i z e o f the h o s p i t a l  (number o f beds) and number and type o f p a t i e n t s  (cases).  To  account f o r v a r i a t i o n a c r o s s h o s p i t a l s i n terms o f d i f f e r e n t type o f p a t i e n t s , c o s t p e r case i s s t a n d a r d i z e d  to include  emergency, t e a c h i n g ,  and non-departmental expenses have been r e -  research  inpatient costs only.  moved to r e a c h a measure o f "pure" i n p a t i e n t c o s t s .  Outpatient,  I t i s also  standard-  i z e d i n terms o f case mix by the RNI o r the case c o m p l e x i t y v a r i a b l e , CMPXC1, and s p e c i a l i z a t i o n v a r i a b l e , SPCLC1, d e r i v e d theory.  Twelve a d d i t i o n a l v a r i a b l e s a r e i n c l u d e d  from  to adjust  information f o r the  influence o f — (i) (ii) (iii) (iv)  age-sex,  to F  average l e n g t h  g  o f s t a y , ALS  wage l e v e l s w i t h i n  a h o s p i t a l , WAGE1  s k i l l mix o f non-medical s t a f f p e r s o n n e l , WAGE2  Two o t h e r v a r i a b l e s , which a r e n o t i n c l u d e d  i n inpatient  costs,  but which may have an e f f e c t on i n p a t i e n t a c t i v i t y , a r e i n c l u d e d . are an e d u c a t i o n expense v a r i a b l e , EDRAT and an o u t p a t i e n t OUTXPD.  These  expense v a r i a b l e ,  104  T h i s b e h a v i o u r a l c o s t e q u a t i o n i s borrowed from the work of Evans and Walker (1972) and Barer  (1977) so j u s t i f i c a t i o n f o r the n a t u r e of  the model i s not p r o v i d e d here.  The purpose of t h i s study i s to assess  the r e l a t i v e m e r i t s of the two measures of case mix measures, CMPXC1 and develop  (RNI and  complexity  SPCLC1, d e r i v e d from i n f o r m a t i o n theory) and  an a p p r o p r i a t e model f o r h o s p i t a l budgeting  purposes  to  i n Alberta.  A n a l y s i s of the r e s u l t s w i l l be i n t h r e e p a r t s : (i)  an e v a l u a t i o n of the RNI  of case (ii) and  compared w i t h i n f o r m a t i o n theory measures  mix.  a d i s c u s s i o n of the s i g n i f i c a n c e of the r e g r e s s i o n c o e f f i c i e n t s the extent to which they meet a p r i o r i e x p e c t a t i o n s .  (iii)  s e l e c t i o n of the " b e s t " e q u a t i o n and  budgetary  i t s a p p l i c a t i o n to the  process.  Each p a r t w i l l be c o n s i d e r e d i n terms of c o s t per day c o s t per case  4.1.  (DAYEX) and  (CASEX).  An E v a l u a t i o n of the RNI  Compared to I n f o r m a t i o n Theory  Measures of Case Mix The most d i r e c t means of a s s e s s i n g the power of the case  mix  measures i n e x p l a i n i n g the dependent v a r i a b l e s , DAYEX and CASEX, i s to l o o k a t a simple r e g r e s s i o n e q u a t i o n which c o n t a i n s o n l y one variable.  T a b l e 4.1  independent  shows the r e s u l t s of t h i s simple r e g r e s s i o n a n a l y s i s .  In e q u a t i o n I, CMPXC1 i s the independent  v a r i a b l e w i t h DAYEX as  the  2 dependent v a r i a b l e .  The  adjusted R  r e s u l t i s 0.369 which means t h a t  case complexity, measured i n t h i s way,  e x p l a i n s approximately  of the v a r i a n c e i n h o s p i t a l c o s t s per day.  37  percent  When SPCLC1 (the h o s p i t a l  s p e c i a l i z a t i o n v a r i a b l e d e r i v e d from i n f o r m a t i o n theory) i s added i n e q u a t i o n I I , an a d d i t i o n a l 14 p e r c e n t of v a r i a n c e i s e x p l a i n e d , r a i s i n g  T a b l e 4.1.  DAYEX E q u a t i o n s w i t h A l t e r n a t i v e Case Complexity I  Adjusted R F MSE  CMPXC1 t  2  0.369  0.513  III 0.609  0.182  59.36  16.75  25.70  708.80  547.92  439.03  919.50  152.34 8.13*  143.68 8.68*  123.45 3.73*  7.93 5.77*  9.3.9 4.27*  F  3 are s i g .  RNI  134.30 5.07*  t Constant t  IV  66.03  SPCLC1 t F  II  Variables  -23.08 -1.43  -29.52 -2.08*  I n d i c a t e s s i g n i f i c a n c e a t 0.05 l e v e l .  -16.25 -0.62  -5.71 -0.26  106  the a d j u s t e d R  v a l u e to 0.513.  are i n c l u d e d t o add another  In e q u a t i o n I I I , the age-sex v a r i a b l e s  10 p e r c e n t e x p l a n a t o r y power and t o i n c r e a s e  2 the a d j u s t e d R  to 0.609.  T h i s compares w i t h e q u a t i o n IV which has  DAYEX as the dependent v a r i a b l e and the RNI as the independent  variable.  2 The  adjusted R  v a l u e o f t h i s e q u a t i o n i s 0 . 1 8 2 — s i g n i f i c a n t l y lower  than the e q u a t i o n w i t h CMPXC1. Another s e t o f equations i s p r o v i d e d i n T a b l e 4.2. t a i n s the same independent  v a r i a b l e s as T a b l e 4.1 but the dependent  v a r i a b l e here i s CASEX i n s t e a d o f DAYEX. independent  The s e t con-  The e x p l a n a t o r y power o f the  v a r i a b l e s i s not as s t r o n g as those i n the DAYEX e q u a t i o n .  2 The a d j u s t e d R v a l u e f o r the f i r s t e q u a t i o n w i t h CMPXC1 i s o n l y 0.238. I t i n c r e a s e s t o 0.492 when SPCLC1 i s added, and to 0.631 w i t h the age2 sex f a c t o r s c o r e s .  E q u a t i o n IV, w i t h the RNI, g i v e s an a d j u s t e d R  of  0.497, a s i g n i f i c a n t i n c r e a s e over the e x p l a n a t o r y power o f the same v a r i a b l e i n the DAYEX e q u a t i o n . variables  To assess whether the complexity  (CMPXC1 o r RNI) a r e p i c k i n g up e f f e c t s o f f a c t o r s other  case mix, such as s i z e of the h o s p i t a l o r average  than  l e n g t h o f s t a y , we  need to examine t h e i r e x p l a n a t o r y power when they a r e i n c l u d e d w i t h other v a r i a b l e s measuring For t h i s purpose, model developed  these  factors  directly.  as we d e s c r i b e d i n Chapter  by Evans and Walker (1972 and Barer  3, we adopted the (1977) which  i n c l u d e s v a r i a b l e s f o r s i z e , c a p a c i t y , wage l e v e l s , e d u c a t i o n and outp a t i e n t expenses as w e l l as case c o m p l e x i t y .  T a b l e 4.3 and T a b l e  show the r e g r e s s i o n c o e f f i c i e n t s f o r d i f f e r e n t combinations  4.4  of these  v a r i a b l e s w i t h DAYEX and CASEX as the r e s p e c t i v e dependent v a r i a b l e s . The  t a b l e s a r e s t r u c t u r e d t o show the e x p l a n a t o r y power o f the b a s i c  model and to  highlight  the  additional  explanatory  power  107  T a b l e 4.2.  CASEX E q u a t i o n s w i t h A l t e r n a t i v e Case Complexity  I  Adjusted R F MSE  CMPXC1 t  2  0.238  54.73  97218.48  64851.81  1312.41 5.98*  F  V  III  0.492  35.73  SPCLC1 t F  II  0.497  18.28  1190.27 6.61* 111.79 7.48*  47052.64  110.78 •  64171.14  1610.66 4.71* 38.13 1.68 3 are s i g .  9  RNI  2329.54 10.53*  t Constant t  IV  0.631  '  Variables  -322.35 -1.71  -413.16 -2.67*  I n d i c a t e s s i g n i f i c a n c e a t 0.05  level.  -625.84 -2.29*  -1151.20 -6.18*  108  t h a t o c c u r s w i t h the s u c c e s s i v e i n c l u s i o n of the ease mix complexity v a r i a b l e s . ; E q u a t i o n I i n T a b l e 4.3 shows the e x p l a n a t o r y power o f the b a s i c 2 model without 0.408.  the case complexity measure.  The a d j u s t e d R  value i s  The main v a r i a b l e d r i v i n g t h i s s i g n i f i c a n t r e s u l t i s INVDFR, the  s i z e v a r i a b l e which has a l a r g e p o s i t i v e c o e f f i c i e n t . s i z e v a r i a b l e , i s a l s o p o s i t i v e and s i g n i f i c a n t .  BDDFR, t h e o t h e r  The o n l y o t h e r  1  s i g n i f i c a n t v a r i a b l e i s OUTXPD s u g g e s t i n g t h a t o u t p a t i e n t a c t i v i t y influences inpatient costs.  C l o s e examination  c o e f f i c i e n t s between the independent correlation  of EDRAT.^  variables reveals a high p o s i t i v e  (0.83) between EDRAT and BDDFR.  the independent  v a r i a b l e s may account  of the c o r r e l a t i o n  This m u l t i c o l l i n e a r i t y of  f o r the unexpected  negative  result  One o f these v a r i a b l e s must be e l i m i n a t e d from the r e g r e s s i o n  e q u a t i o n i f r e l i a b i l i t y o f r e g r e s s i o n c o e f f i c i e n t s i s t o be ensured. Subsequent equations exclude EDRAT and r e t a i n BDDFR. s i g n i f i c a n c e o f EDRAT without  The independent  BDDFR was t e s t e d i n equations V I I I and IX.  In both of these e q u a t i o n s , EDRAT changed i t s s i g n from n e g a t i v e to p o s i t i v e , although i t s t - s t a t i s t i c was s t i l l n o t s i g n i f i c a n t . We t u r n a g a i n t o t h e main p o i n t of t h i s s e c t i o n — t o e v a l u a t e the r e l a t i v e e x p l a n a t o r y power o f t h e case complexity v a r i a b l e s .  Equation  I I I i n T a b l e 4.3 c o n t a i n s s i x o f the seven o r i g i n a l v a r i a b l e s i n the b a s i c model (EDRAT i s excluded)  and i n t r o d u c e s CMPXC1, one o f the 2  i n f o r m a t i o n theory measures o f case mix.  The o v e r a l l a d j u s t e d R  value  improves from 0.414 t o 0.651 w i t h the a d d i t i o n o f t h i s v a r i a b l e — a n i n c r e a s e i n e x p l a i n e d v a r i a n c e of n e a r l y 24 p e r c e n t . When SPCLC1 i s 2 added, i n E q u a t i o n IV, the a d j u s t e d R i n c r e a s e s by another 10 p e r c e n t , to 0.759.  The i n t r o d u c t i o n o f t h e age-sex f a c t o r s c o r e s i n e q u a t i o n V 2  increases the R  v a l u e t o 0.798.  E q u a t i o n VI c o n t a i n s CMPXC1 and the  Table 4.3.  DAYEX Equations w i t h S i z e , U t i l i z a t i o n , Wage, I n d i r e c t I  2 Adjusted R F MSE INVDFR t  0.408  II  III  0.414  0.651  11.95  14.05  665.03  659.20  30.63 391.85  IV 0.759  270.86  227.40  275.63  575.52  232.86  279.53  7.61 2.46*  ALS  -0.24 • -0.21  -0.26 -0.23  -0.47 -0.54  -1.98 -2.59*  WAGE1 t  33.01 1.37  32.43 1.36  34.27 1.86  12.94 0.83  WAGE2  75.86 1.28  76.88 1.31  25.90 0.57  111.94 2.80*  OUTXPD t  445.99 5.29*  443.13 5.31*  146.91 2.01*  38.14 0.61  EDRAT t  -82.24 -0.28  10010.49 8.34*  9742.43 7.65* 6.06 1.84 -1.73 -2.17*  11016.08 8.05* -2.49 -0.83  8659.48 5.02*  10088.98 7.96*  10290.40 8.50*  -1.75 -2.29*  7.29 1.94  -1.69 . -1.93  -2.23 -1.91  -1.59 -1.99*  6.91 0.43  20.19 1.17  35.18 1.58  6.01 0.37  11.50 0.72  82.00 2.12*  60.18 1.42  125.60 2.23*  76.59 1.96*  106.92 2.64*  3.22 0.45  325.52 3.91*  -9.69 -0.15  137.24 7.70*  129.77 3.95*  8.35 6.89*  9.18 4.60* 3 are s i g .  221.75 7.72*  3 are s i g .  RNI  -19.97 -0.31  30.50 0.48  132.89 1.04  214.82 1.63  152.05 5.12*  151.16 9.25*  7.81 4.35*  7.64 6.55*  3 are s i g . 111.03 4.03*  t Constant t  *  0.751 42.92  -1.63 0.49  SPCLC1 t  0.793  IX  25.99  12.90 3.44*  174.16 8.52*  0.488  VIII  16.11  14.26 2.33*  CMPXC1 t  0.755  VII  22.36  BDDFR t  t  0.798  VI  Variables  26.75  10699.07 6.06*  t  V  and S p e c i a l i z a t i o n  44.71  10681.60 6.02*  12502.24 9.08*  Expense, Case Complexity  -90.19 -1.40  -90.06 -1.40  I n d i c a t e s s i g n i f i c a n c e at 0.05  level.  -166.26 -3.30*  -184.65 -4.40*  -140.46 -3.02*  -198.30 -4.02*  -198.51 -3.01*  -150.41 -3.23*  -188.89 -4.43*  age-sex f a c t o r s c o r e s and excludes These e q u a t i o n s  (equation I I ) .  age-sex f a c t o r s c o r e s  age-sex f a c t o r s c o r e s  4.3  2  (R 2  The RNI  2  (R  i s 0.755. alternative  adjusted R 2  2  is  f o r the b a s i c  adds much l e s s to the e x p l a n a t o r y power 2  i n c r e a s e d by 0.24)  i n c r e a s e d by 0.34)  CMPXC1 p l u s  o r CMPXC1, SPCLC1 and  i n c r e a s e d by 0.38).  c o n t a i n s the same s e t of r e g r e s s i o n equations  but the dependent v a r i a b l e here  be noted  The  g r e a t e r than the a d j u s t e d R  the b a s i c e q u a t i o n than CMPXC1 (R  T a b l e 4.4  adjusted R  as a measure of case mix.  0.488, which i s o n l y 0.07  of  The  should be compared w i t h e q u a t i o n I I I , the  e q u a t i o n u s i n g the RNI  equation  SPCLC1.  i s c o s t per case, CASEX.  t h a t the CASEX e q u a t i o n , as s p e c i f i e d i n Chapter  average l e n g t h of s t a y (ALS)  as an independent v a r i a b l e .  3,  as  Table  I t should contained  Preliminary  t e s t i n g of t h i s e q u a t i o n r e v e a l e d a s t r o n g c o r r e l a t i o n between INVCFR and ALS  (.64)  variables.  i n d i c a t i n g m u l t i c o l l i n e a r i t y between the independent  I t i s not immediately  v a r i a b l e s should be c o r r e l a t e d . f o r ALS  apparent,  a p r i o r i , why  As an a l t e r n a t i v e , OCC  the  two  was s u b s t i t u t e d  i n the CASEX e q u a t i o n to p r o v i d e an independent measure of  utilization. Equation  variables.  The  I r e p r e s e n t s the b a s i c model without 2 adjusted R  any  case  complexity  i s 0.630—63 p e r c e n t of v a r i a n c e i n c o s t  per case among h o s p i t a l s i s e x p l a i n e d by these seven v a r i a b l e s .  In  e q u a t i o n I I w i t h CMPXC1 added, an a d d i t i o n a l 16 p e r c e n t of v a r i a t i o n i s 2 2 explained (adjusted R i s 0.790). The a d j u s t e d R i s further increased to  0.885 when SPCLC1 i s added  sex f a c t o r s c o r e s  ( e q u a t i o n I I I ) , and  (equation IV).  to 0.897 w i t h the  By comparison 71 p e r c e n t  age-  (adjusted  2 R  = 0.710) of t o t a l v a r i a n c e i s e x p l a i n e d when the RNI  case mix v a r i a b l e ( e q u a t i o n V I ) — a n  i s used as  the  i n c r e a s e i n e x p l a n a t o r y power of  Table 4.4.  CASEX Equations with S i z e , U t i l i z a t i o n , Wage, I n d i r e c t  I 2 Adjusted R F MSE INVCFR t BDCFR t  0.630  0.790  0.885  IV 0.897  V 0.875  VI 0.710  VII 0.894  Variables  VIII 0.878  53.21  96.18  54.83  46.51  35.00  55.85  47211.55  101.03  26797.84  14642.26  13119.36  16013.34  36989.67  13578.63  15548.07  19741.91 11.22*  20276.86 15.28*  16416.77 15.42*  16312.68 13.77*  17084.41 13.18*  15477.88 8.88*  16858.31 14.34*  17237.34 16.38*  9.55 2.72*  7.59 2.07*  0.49 0.11  -0.57 -0.16  8.06 1.55  628.58 3.35*  415.52 2.90*  463.46 4.37*  460.01 4.16*  414.88 3.41*  576.50 3.47*  466.33 4.15*  482.44 4.43*  WAGE1 t  390.93 1.91  401.14 2.61*  142.10 1.21  156.27 1.27  256.93 1.92  379.89 2.10*  147.65 1.18  134.94 1.12  WAGE2 t  177.15 0.35  -247.68 -0.65  550.71 1.87  463.57 1.58  341.81 1.06  653.28 1.44  445.58 1.49  533.91 1.76  OUTXPD t  3692.08 5.13*  1200.20 1.97*  -29.60 -0.63  -285.43 -0.57  -173.08 -0.31  2309.09 3.37*  -413.52 - 0.82  -101.80 -0.21  165.80 0.63  731.76 0.37  474.78 0.32  461.34 0.33  1110.29 0.72  -785.91 -0.34  2577.58 2.66*  3494.35 3.57*  1498.21 8.96*  1136.68 8.77*  1481.26 6.55*  1267.80 10.23*  56.03 4.11*  77.38 8.63*  t  EDRAT t CMPXC1 t SPCLCl t F  Ill  and S p e c i a l i z a t i o n  28.01  13.42 2.33*  OCC  II  Expense, Case Complexity  l  F  84.18 9.30*  1252.43 C 5.04* 69.94 4.66* 1 is sig.  9  1951.28 8.92*  2 are s i g .  RNI  1235.34 5.45*  t Constant t  *  1 i s sig.  -1201.01 -2.00*  -1699.97 -3.73*  I n d i c a t e s s i g n i f i c a n c e a t 0.05 l e v e l .  -1888.35 -5.60*  -1860.02 -4.95*  -2298.54 -5.72*  -2384.05 -4.15*  -1997.69 -5.31*  -1977.82 -5.72*  112  8 p e r c e n t over the b a s i c model ( e q u a t i o n I) but o n l y e q u i v a l e n t t o h a l f the amount added by CMPXC1 to the same b a s i c e q u a t i o n . As i n the DAYEX e q u a t i o n , m u l t i c o l l i n e a r i t y e x i s t s between EDRAT and  INVCFR i n the CASEX e q u a t i o n .  excluded, variable. equations  In equations V I I and V I I I , BDDFR i s  r e s u l t i n g on t h i s o c c a s i o n i n a p o s i t i v e and s i g n i f i c a n t EDRAT In T a b l e 4.6,  however, EDRAT i s excluded  I I , I I I , IV, V, V I , V I I .  from the CASEX  In these s i x e q u a t i o n s  BDCFR i s  p o s i t i v e and s i g n i f i c a n t . The  g e n e r a l c o n c l u s i o n from T a b l e s 4.3  and 4.4  i s t h a t the RNI  does not e x p l a i n as much of the i n t e r - h o s p i t a l c o s t v a r i a t i o n s as CMPXC1 (the i n f o r m a t i o n theory case complexity measure).  When SPCLC1 and the  age-sex f a c t o r s c o r e s a r e added the e x p l a n a t o r y power o f the i n f o r m a t i o n theory approach i s f u r t h e r enhanced. r e s e r v a t i o n s , d i s c u s s e d i n Chapter charges  as a proxy  I t would seem t h a t our a p r i o r i  2, about the RNI and i t s use o f  f o r costs, are j u s t i f i e d .  Cross s u b s i d i z a t i o n among  v a r i o u s departments and d i f f e r e n t c a t e g o r i e s o f p a t i e n t s , i s common p r a c t i c e i n American h o s p i t a l s . t h a t charges  T h i s d i s t o r t s the charge s t r u c t u r e so  f o r a p a r t i c u l a r case may n o t r e f l e c t  the a c t u a l c o s t of  t r e a t i n g t h a t case.  4.2.  S i g n i f i c a n c e o f the R e g r e s s i o n  Coefficients  In t h i s s e c t i o n our a t t e n t i o n i s focused on the r e g r e s s i o n c o e f f i c i e n t s r e p o r t e d i n T a b l e s 4.3 The v a r i a b l e s , i n both  and  4.4.  the DAYEX and CASEX e q u a t i o n s , w i t h the  g r e a t e s t magnitude and degree o f s i g n i f i c a n c e are INVDFR i n DAYEX and INVCFR i n CASEX. These v a r i a b l e s , t o g e t h e r w i t h BDDFR and BDCFR,.  m  e  e  t  a p r i o r i e x p e c t a t i o n s — t h a t as h o s p i t a l s i z e i n c r e a s e s , average c o s t  113  per day and per case i n c r e a s e s . The  OCC v a r i a b l e i n t h e CASEX e q u a t i o n s has a s t r o n g p o s i t i v e c o e f f i c i e n t  i n a l l equations.  A r i s e i n OCC r e s u l t s from an i n c r e a s e i n e i t h e r admiss^  ions o r i n length o f stay. OCC  I f the r i s e i n OCC i s due to the l a t t e r , t h e  c o e f f i c i e n t shows the p o s i t i v e i n f l u e n c e o f l e n g t h o f s t a y on c o s t  per case, as the e f f e c t o f l e n g t h o f s t a y i s n o t r e p r e s e n t e d independent v a r i a b l e s .  i n other  I f the r i s e i n OCC i s due to an i n c r e a s e i n admiss-  i o n s , the net impact o f t h i s v a r i a b l e on c o s t p e r case i s more complex, as o t h e r  independent v a r i a b l e s (INVCFR, BDCFR) are a l s o f u n c t i o n s o f t h e  l e v e l of admissions. c o s t p e r case,  .- e  As a n example o f the n e t impact o f admissions on  c o n s i d e r a ' r e p r e s e n t a t i v e ' h o s p i t a l w i t h 400 beds and  12,000 a d m i s s i o n s .  Assume an i n c r e a s e i n admissions o f 5 p e r c e n t  (12,600)  which would r e s u l t i n an approximate i n c r e a s e i n the occupancy r a t e o f n e a r l y 4 percent, Table  holding length o f stay constant.  According  to equation  III,  4.4, the net impact on c o s t p e r case i s (-0.002) x 16416.77 +  (-.64) x 9.55 + (0.04) x 463.46 = -$20.40. 5 percent,  other  things equal,  reduced t h e r e p r e s e n t a t i v e h o s p i t a l s c o s t  per case by a p p r o x i m a t e l y $20. l e n g t h o f s t a y by 5 percent constant.  The net  An i n c r e a s e o f admissions by  By c o n t r a s t , assume an i n c r e a s e o f average  (or about h a l f a day), h o l d i n g  admissions  impact on c o s t p e r case i s (.05) x 463.46 = $23.17, an  i n c r e a s e o f a p p r o x i m a t e l y $23. The wage v a r i a b l e s , WAGE1 and WAGE2, are p o s i t i v e , b u t i n most e q u a t i o n s not  significant.  I n the DAYEX e q u a t i o n s  (Table 4.3),  WAGE1 i s never  i c a n t and WAGE2 i s s i g n i f i c a n t i n f i v e o u t o f the n i n e e q u a t i o n s . no obvious e x p l a n a t i o n  for this.  However, Barer's  c o e f f i c i e n t s were not always s i g n i f i c a n t . 4.4),  signif-  There i s  (1977) WAGE1 and WAGE2  In t h e CASEX e q u a t i o n s  (Table  two o f the WAGE1 c o e f f i c i e n t s a r e s i g n i f i c a n t , w h i l e none o f t h e  114  WAGE2 c o e f f i c i e n t s  are s i g n i f i c a n t .  for this insubstantial The  A g a i n t h e r e i s no obvious e x p l a n a t i o n  and e r r a t i c performance.  next two v a r i a b l e s a r e o u t p a t i e n t expense, OUTXPD, and e d u c a t i o n  expense, EDRAT.  They were i n c l u d e d i n Evans' and Walker's (1972) and B a r e r ' s  (1977) models t o determine the i n f l u e n c e o f these a c t i v i t i e s on c a r e and to t e s t  the s u c c e s s o f i s o l a t i n g n o n - d i r e c t i n p a t i e n t  from t o t a l h o s p i t a l  expenditure.  OUTXPD i s p o s i t i v e  of  the n i n e DAYEX e q u a t i o n s (Table 4.3)  of  the e i g h t CASEX e q u a t i o n s  ients  and p o s i t i v e  (Table 4.4).  Positive  suggest t h a t o u t p a t i e n t a c t i v i t y does a f f e c t  inpatient expenditure  and s i g n i f i c a n t  i n four  and s i g n i f i c a n t  i n three  and s i g n i f i c a n t inpatient  costs.  coefficThus the  c o s t o f o u t p a t i e n t a c t i v i t y goes beyond the a c c o u n t i n g items i d e n t i f i e d and e l i m i n a t e d from i n p a t i e n t c o s t on i n p a t i e n t and  significant  equations. indirect 1972,  expenditure.  activity.  coefficient  In t h i s sense, i t imposes an i n d i r e c t  Evans and Walker (1972) d e t e c t e d a  f o r t h e i r o u t p a t i e n t v a r i a b l e i n a l l t h e i r CASEX  Hence t h e i r c l a i m t h a t "an o u t p a t i e n t f a c i l i t y c l e a r l y  c o s t s on the r e s t o f the h o s p i t a l  408).  positive  imposes  o p e r a t i o n " (Evans and Walker,  The e r r a t i c performance o f OUTXPD here makes i t d i f f i c u l t to  make any f i r m statement on the e f f e c t o f o u t p a t i e n t a c t i v i t y on c o s t s i n the A l b e r t a  inpatient  setting.  EDRAT, on the o t h e r hand, was found to c o r r e l a t e  h i g h l y w i t h another  independent v a r i a b l e i n both the DAYEX and CASEX e q u a t i o n s .  In each case i t  was the v a r i a b l e s e r v i n g the same f u n c t i o n : BDDFR and BDCFR  respectively.  EDRAT was excluded from the DAYEX e q u a t i o n s i n Table 4.3 c l u d e d i n the CASEX e q u a t i o n s i n T a b l e 4.4,  i t was n o t s i g n i f i c a n t  e q u a t i o n s V I I and V I I I when BDCFR was e x c l u d e d . was both p o s i t i v e ect  cost e f f e c t  and s i g n i f i c a n t  on i n p a t i e n t  care.  and when i t was i n except i n  In these two equations i t  s u g g e s t i n g e d u c a t i o n a c t i v i t y has an i n d i r -  115  The case mix complexity v a r i a b l e , GMPXC1, d e r i v e d from i n f o r m a t i o n theory i s s i g n i f i c a n t and p o s i t i v e i n both DAYEX and CASEX e q u a t i o n s .  The  range f o r h o s p i t a l complexity measures i s 0.65 t o 1.75, showing a s u b s t a n t i a l degree o f v a r i a t i o n i n case mix. dramatic d i f f e r e n c e s i n average  T h i s case mix v a r i a t i o n r e s u l t s i n q u i t e  p e r day and p e r case c o s t s .  For instance  ( u s i n g the e s t i m a t e s f o r CMPXC1 i n e q u a t i o n IV, Table 4.3 and e q u a t i o n I I I , Table 4.4)' a h o s p i t a l w i t h a case complexity v a l u e o f 1.0 w i l l expect  to have  p a t i e n t day c o s t s and case c o s t s $27.45 and $227.34 h i g h e r , r e s p e c t i v e l y , than another h o s p i t a l which, c e t e r i s p a r i b u s , has a case c o m p l e x i t y v a l u e o f 0.80.  T h i s s u b s t a n t i a l d i f f e r e n c e i n c o s t s has important p o l i c y  implications  f o r t h e reimbursement o f h o s p i t a l s , i l l u s t r a t i n g q u i t e c l e a r l y t h a t a f l a t r a t e p e r p a t i e n t day o r p e r case i s inadequate  t o take account o f case mix  variation. The RNI i s p o s i t i v e and s i g n i f i c a n t i n both the DAYEX and CASEX equat2 ions.  However, i t s c o n t r i b u t i o n to the a d j u s t e d R  the same as i s t h a t o f CMPXC1.  T h i s can be seen by comparing DAYEX equations  I I , I I I , V I and V I I i n T a b l e 4.3.  E q u a t i o n I I i s t h e b a s i c model 2  EDRAT) w i t h no case mix complexity v a r i a b l e s . i o n i s 0.414.  o f the e q u a t i o n i s n o t  The a d j u s t e d R  (without  f o r this  equat-  E q u a t i o n I I I i s the b a s i c model p l u s the CMPXC1 v a r i a b l e arid 2  i t s adjusted R  i s 0.651. 2  the a d j u s t e d R i n g the RNI.  Adding  the age-sex f a c t o r s c o r e s i n e q u a t i o n V I , 2  i n c r e a s e s to 0.755 .  E q u a t i o n V I I i s the b a s i c model i n c l u d -  The a d d i t i o n o f the RNI o n l y improves the e x p l a n a t o r y power o f  the e q u a t i o n by 7 p e r c e n t — t h i s i s s i g n i f i c a n t l y l e s s than the 24 p e r c e n t added by CMPXC1 o r the 34 p e r c e n t added by CMPXC1 and the age-sex f a c t o r scores. In the CASEX equations  (Table 4.4) the RNI performs  b e t t e r r e l a t i v e to  CMPXC1 than i t s r e l a t i v e performance i n the DAYEX e q u a t i o n s .  The RNI i n  116  e q u a t i o n VI adds 8 p e r c e n t to the a d j u s t e d R  o f the b a s i c model; CMPXC1 i n  e q u a t i o n I I adds 16 p e r c e n t and 24 p e r c e n t when the age-sex f a c t o r s c o r e s a r e included  (equation V ) .  These comparisons: i n d i c a t e t h a t the i n f o r m a t i o n theory  measure a g a i n c o n t r i b u t e d more to the understanding  of i n t e r - h o s p i t a l cost  v a r i a t i o n than the RNI.  The  SPCLCl v a r i a b l e i s s i g n i f i c a n t but p o s i t i v e i n the DAYEX and CASEX  equations.  T h i s r e s u l t i s s u r p r i s i n g — t h e a p r i o r i b e l i e f was t h a t a more v,  specialized hospital  ( i . e . a h o s p i t a l w i t h a r e l a t i v e l y s m a l l e r range o f case  types) would be r e l a t i v e l y l e s s c o s t l y than a l e s s s p e c i a l i z e d Hence the a p r i o r i expected  sign i s negative.  T h i s anomalous p o s i t i v e and  s i g n i f i c a n t c o e f f i c i e n t was a l s o o b t a i n e d by Evans and Walker F u r t h e r examination  a t y p i c a l combination  (1972).  o f t h i s unexpected r e s u l t was n o t p o s s i b l e due to  time c o n s t r a i n t s b u t a t e n t a t i v e e x p l a n a t i o n i s p o s i t e d h e r e . i o n o f the raw data  hospital.  Close i n s p e c t -  (Appendix 3.2) r e v e a l s a few h o s p i t a l s which have an o f CMPXC1 and SPCLCl v a l u e s .  F o r i n s t a n c e , h o s p i t a l 32  has a CMPXC1 o f 1.75 (the h i g h e s t f o r a l l A l b e r t a h o s p i t a l s ) and a SPCLCl v a l u e o f 14.53 (the h i g h e s t among a l l A l b e r t a h o s p i t a l s ) .  T h i s means t h a t the  h o s p i t a l has a v e r y complex c a s e l o a d b u t i t i s a l s o h i g h l y s p e c i a l i z e d , i . e . i t has a r e l a t i v e l y l i m i t e d range o f diagnoses. h o s p i t a l s where the r e v e r s e s i t u a t i o n e x i s t s .  Conversely,  t h e r e a r e some  F o r i n s t a n c e h o s p i t a l 47 has a  CMPXC1 v a l u e o f 0.93, i n d i c a t i n g t h a t i t i s s l i g h t l y below "average" of i t s ".case c o m p l e x i t y .  i n terms  I t s SPCLCl v a l u e , however, i s v e r y low (0.45) sugg-  e s t i n g t h a t i t i s a v e r y g e n e r a l i z e d h o s p i t a l t r e a t i n g a range o f d i a g n o s e s . H o s p i t a l 76 i s s i m i l a r i n t h i s r e s p e c t h a v i n g a CMPXC1 v a l u e o f 0.93 and a SPCLCl v a l u e o f 0.58. relative isolation.  These h o s p i t a l s have one major f a c t o r i n common-—their  T h i s e x p l a i n s t h e i r g e n e r a l i z e d c a s e - l o a d as they a r e  117  r e g i o n a l c e n t r e s drawing from wide, d i v e r s e catchment a r e a s .  I t would be an  i n t e r e s t i n g e x e r c i s e to exclude these h o s p i t a l s from the d a t a s e t and see what e f f e c t t h i s has on the s i g n o f the parameter e s t i m a t e . ment i s beyond the scope o f the p r e s e n t  However, t h i s  refine-  study.  F i n a l l y , the remaining v a r i a b l e s a r e the age-sex f a c t o r s c o r e s . c o e f f i c i e n t s must be l e f t l a r g e l y u n e x p l a i n e d as t h e r e i s no obvious a t i o n s o f these s c o r e s .  interpret-  Three o u t o f n i n e s c o r e s a r e s i g n i f i c a n t i n the DAYEX  equations but o n l y one o u t o f n i n e i n the CASEX e q u a t i o n s .  They i n c r e a s e the  e x p l a n a t o r y power o f t h e b a s i c e q u a t i o n w i t h CMPXC1 by 10 p e r c e n t equations  Their  I I I and V I , T a b l e 4.3).  (compare  However, i f they a r e added to the b a s i c  e q u a t i o n which i n c l u d e s SPCLC1 as w e l l as CMPXC1, they o n l y e x p l a i n ah a d d i t i o n a l 4 p e r c e n t o f t o t a l v a r i a n c e (see equations IV and V, T a b l e 4.3).  The  combined e f f e c t o f these f a c t o r s c o r e s on the CASEX e q u a t i o n s i s even l e s s obvious.  When added to the b a s i c e q u a t i o n i n c l u d i n g CMPXC1, they add 8 p e r -  cent to e x p l a i n e d v a r i a n c e (compare I I and V, T a b l e 4.4).  However, when  SPCLC1 i s i n c l u d e d , they add o n l y 1 p e r c e n t to e x p l a i n e d v a r i a n c e (compare e q u a t i o n s I I I and IV, T a b l e  4.4).  4.3  Equation  S e l e c t i o n o f the " B e s t " In the f i r s t  s e c t i o n o f t h i s c h a p t e r we examined the r e l a t i v e m e r i t s o f  the i n f o r m a t i o n t h e o r y measures o f case mix complexity and the Resource Need Index.  In the second  s e c t i o n the r e g r e s s i o n c o e f f i c i e n t s f o r the independent  v a r i a b l e s were examined i n d i v i d u a l l y . the e q u a t i o n o f " b e s t  In t h i s s e c t i o n we t r y to i d e n t i f y  fit".  C r i t e r i a f o r a s s e s s i n g a "best f i t " e q u a t i o n a r e both s t a t i s t i c a l and p r a c t i c a l i n nature. (i)  a maximum R  2  The s t a t i s t i c a l c r i t e r i a i n c l u d e :  value.  2 The h i g h e r the R , the g r e a t e r the amount o f  v a r i a n c e e x p l a i n e d by the independent  variables.  118  ( i i ) an o v e r a l l s i g n i f i c a n t F v a l u e . all  T h i s t e s t i s used t o determine whether  the independent v a r i a b l e s taken together  s i g n i f i c a n t l y c o n t r i b u t e to the  p r e d i c t i o n o f the dependent v a r i a b l e . ( i i i ) a significant t-statistic  f o r each o f the r e g r e s s i o n c o e f f i c i e n t s .  t e s t determines whether i n d i v i d u a l independent v a r i a b l e s contribute The  significantly  to the p r e d i c t i o n o f the dependent v a r i a b l e .  practical criteria  (i)  This  are:  ease o f data c o l l e c t i o n .  I t i s important t h a t d a t a be r e a d i l y a v a i l a b l e  so t h a t a n a l y s i s can occur on a r e g u l a r b a s i s w i t h minimal time and e f f o r t expended. (ii) be  low c o s t .  Both the data and r e s o u r c e s  required  f o r the a n a l y s i s  should  inexpensive.  ( i i i ) a l i m i t e d number o f v a r i a b l e s .  T h i s w i l l make i n t e r p r e t a t i o n s t r a i g h t -  forward. T a b l e s 4.5 and 4.6 have been compiled so t h a t the i d e n t i f i c a t i o n o f the " b e s t " e q u a t i o n s can be made by s y s t e m a t i c a l l y a p p l y i n g the above s e t o f c r i t e r i a . 4.3.1. The per  DAYEX o r CASEX?  c h o i c e between funding  h o s p i t a l s on a c o s t p e r day (DAYEX) o r a c o s t  case (CASEX) b a s i s i s a d e c i s i o n to be made by the r e i m b u r s i n g  Cost p e r day reimbursement c o u l d encourage l o n g e r crease  i n the number o f a d m i s s i o n s .  lengths  Most p r o v i n c e s  agency.  o f s t a y and an i n -  i n Canada have t o t a l bud-  get reimbursement, where t h e t o t a l budget i s determined p r o s p e c t i v e l y on the b a s i s o f t o t a l p a t i e n t days.  In t h i s sense i t i s s i m i l a r t o c o s t p e r day  reimbursement p r e d i c t e d p r o s p e c t i v e l y f o r a y e a r . The  tendency o f c o s t p e r day reimbursement to encourage l o n g e r  of s t a y has r e s u l t e d i n a s h i f t  towards p r o s p e c t i v e  ment by a number o f r e i m b u r s i n g  a g e n c i e s i n the U n i t e d  d i s a d v a n t a g e s o f t h i s approach a r e :  lengths  c o s t p e r case reimburseStates.  The a n t i c i p a t e d  ( i ) i t may encourage an i n c r e a s e d  number  119  of  admissions,  ( i i ) i t may  l e a d h o s p i t a l a d m i n i s t r a t o r s to code p a t i e n t s i n t o  " l u c r a t i v e " d i s e a s e c a t e g o r i e s , ( i i i ) i t may  a f f e c t q u a l i t y of c a r e — the i n -  s t i t u t i o n r m a y "use fewer r e s o u r c e s to produce each a d m i s s i o n , . r e g a r d l e s s of case t y p e " ( K l a s t o r i n , Watts, T r i v e d i , 1978, disadvantages,  22).  However, these l a t t e r  i n t h i s c o n t e x t , a r e u n l i k e l y to be r e a l problems.  For  the methodology of both the i n f o r m a t i o n theory measure of case mix and  the RNI  does not encourage i n a p p r o p r i a t e c o d i n g .  ion  t h e o r y , the r e l a t i v e c o n c e n t r a t i o n of a d i a g n o s i s determines  two  one,  complexity  In the case of i n f o r m a t i t s weight:  i n a p p r o p r i a t e c o d i n g by a number of h o s p i t a l s would d i l u t e i t s c o n c e n t r a t i o n and reduce  i t s value.  which the RNI  In the case o f the RNI,  the m a t r i x o f charges  from  i s c a l c u l a t e d , i s c o n f i d e n t i a l i n f o r m a t i o n , r e t a i n e d by CPHA.  Second, the s u g g e s t i o n of reduced  q u a l i t y of c a r e i s u n l i k e l y to be a s e r i o u s  problem because the p h y s i c i a n s , who  determine  the n a t u r e o f c a r e , a r e b i a s e d  towards h i g h e r r a t h e r than lower r e s o u r c e use because i n most cases p a t i e n t s a r e covered by i n s u r a n c e ; and because the c o s t s a s s o c i a t e d w i t h running h o s p i t a l a r e not t h e i r r e s p o n s i b i l i t y .  Furthermore  the  there are q u a l i t y c o n t r o l s  imposed on the system i n the form of peer review and u t i l i z a t i o n  review.  The f o l l o w i n g d i s c u s s i o n t r e a t s the DAYEX and CASEX e q u a t i o n s i n d e p e n d e n t l y . 4.3.2.  The e q u a t i o n o f "best f i t "  T a b l e s 4.5  and 4.6  c o n t a i n what the author c o n s i d e r s to be the p o t e n t -  i a l l y most u s e f u l e q u a t i o n s f o r use i n the b u d g e t i n g p r o c e s s . i n c l u d e d i n any of these e q u a t i o n s because the f i r s t c h a p t e r showed t h a t the RNI was  two  The RNI  sections of  i s not  this  not as powerful a p r e d i c t o r of h o s p i t a l c o s t s ,  as the i n f o r m a t i o n theory measures of case mix  complexity and  specialization. 2  These two measures were r e s p o n s i b l e f o r a much l a r g e r a d j u s t e d R the RNI  i n both DAYEX and  CASEX e q u a t i o n s .  In terms of the p r a c t i c a l  e r i a , both CMPXC1 and SPCLCl a r e r e a d i l y computed through ity  system a t l i t t l e c o s t .  RNI  value  than  crit-r.:  the c u r r e n t morbid: '.'  r e p o r t s f o r a l l A l b e r t a h o s p i t a l s f o r one  1  Table 4  .5.  DAYEX Equations with Information Theory Case Complexity  and S p e c i a l i z a t i o n  Variables VII  0.796 25.01 229.68  9724.08 7.58*  10088.98 7.96*  6.84 1.52  9742.43 7.65*  10401.10 8.59*  9783.73 7.91*  6.06 1.84  6.09 1.86  7.63 2.47*  4.95 1.51 -1.79 -2.26*  -1.72 -2.15*  -1.59 -1.99*  -1.73 -2.17*  -1.71 -2.19*  -2.05 -2.73*  7.19 0.45  6.01 0.37  6.910.43  7.51 0.49  10.93 0.72  81.61 2.09*  76.59 1.96*  82.00 2.12*  80.98 2.13*  118.25 3.07*  -7.86 -0.12  19.97 -0.31  -9.70 -0.15  -44.26 -0.26  132.89 1.04  129.15 3.90*  152.05 5.12*  129.77 3.95*  127.73 4.29*  141.17 8.53*  136.68 4.59*  9.22 4.58*  7.81 4.35*  9.18 4.60*  9.17 4.62*  8.54 7.30*  8.82 4.49*  3 are s i g  3 are s i g .  3 are s i g ,  3 are s i g .  -140.18 -2.99*  -150.41 -3.23*  -140.46 -3.02*  -139.46 -3.04*  i n d i c a t e s s i g n i f i c a n c e a t 0.05 l e v e l .  3 are s i g  -188.27 -4.54*  -58.91 -2.35*  121  y e a r would c o s t $20,000. E q u a t i o n 1 i n Table 4.5 i n c l u d e s a l l the independent  variables.  It sat-  2 i s f i e s 2 out o f the 3 s t a t i s t i c a l c r i t e r i a — h i g h a d j u s t e d R s i g n i f i c a n t o v e r a l l F.  (0.796), and  However, n o t a l l the i n d i v i d u a l c o e f f i c i e n t s a r e  s i g n i f i c a n t — B D D F R , WAGE1, OUTXPD, EDRAT and 6 o f the 9 age-sex f a c t o r are i n s i g n i f i c a n t a t the 5 p e r c e n t l e v e l .  In terms o f p r a c t i c a l c r i t e r i a a l l  v a r i a b l e s a r e e a s i l y o b t a i n a b l e a t low c o s t . e q u a t i o n i s n o t reduced icant variables.  scores  The number o f v a r i a b l e s i n t h i s  to a minimum, as evidenced by the number o f i n s i g n i f -  T h i s makes i n t e r p r e t a t i o n s l i g h t l y more c o m p l i c a t e d and un-  w i e l d y than i f o n l y s i g n i f i c a n t v a r i a b l e s were i n c l u d e d . E q u a t i o n I I i n Table 4.5 i s the same as e q u a t i o n I w i t h no BDDFR v a r i a b l e . T h i s was dropped because o f the h i g h c o r r e l a t i o n between the two v a r i a b l e s , BDDFR and EDRAT. 2 l y smaller adjusted R  independent  The e f f e c t o f dropping BDDFR i s m i n i m a l — a  slight-  and the EDRAT c o e f f i c i e n t i s now p o s i t i v e b u t s t i l l  remains i n s i g n i f i c a n t . 2 In e q u a t i o n I I I , EDRAT was removed and BDDFR i n c l u d e d . now s l i g h t l y h i g h e r than equations i s r e t a i n e d and EDRAT excluded  I and I I .  The R  value i s  In subsequent e q u a t i o n s , BDDFR  to reduce e f f e c t s o f m u l t i c o l l i n e a r i t y .  E q u a t i o n IV, T a b l e 4.5 excludes both EDRAT and OUTXPD.  I t was d e c i d e d  t h a t i f EDRAT was to be removed, on o t h e r grounds, i t was l o g i c a l t o exclude OUTXPD, both because i t has an i n s i g n i f i c a n t r e g r e s s i o n c o e f f i c i e n t and the purpose and c o n s t r u c t i o n o f the v a r i a b l e was the same as f o r EDRAT. r e s u l t i s a " b e t t e r " e q u a t i o n i n terms o f the s p e c i f i e d c r i t e r i a .  The  The a d j u s t -  2 ed R  i s m i n i m a l l y h i g h e r than f o r equations  I to I I I .  The o v e r a l l F v a l u e i s  more s i g n i f i c a n t and 8 out o f the 16 r e g r e s s i o n c o e f f i c i e n t s a r e s i g n i f i c a n t . In terms o f the p r a c t i c a l c r i t e r i a i t i s n o t v e r y d i f f e r e n t from the o t h e r t h r e e e q u a t i o n s , except  t h a t i n t e r p r e t a t i o n i s more s t r a i g h t f o r w a r d , as a r e s -  u l t o f the reduced number o f v a r i a b l e s .  122  As the age-sex f a c t o r s c o r e s account of  f o r the h i g h e s t p r o p o r t i o n  i n s i g n i f i c a n t c o e f f i c i e n t s , and because t h e i r i n d i v i d u a l meaning i s  not c l e a r , they were excluded from e q u a t i o n V.  The r e s u l t  i s a 4 percent  2 decrease  i n e x p l a i n e d v a r i a n c e (R  = 0.761) b u t t h i s i s s m a l l c o n s i d e r i n g  t h a t n i n e v a r i a b l e s were dropped from the e q u a t i o n . seven remaining  S i x out o f the  r e g r e s s i o n c o e f f i c i e n t s are s i g n i f i c a n t , and removal o f  the age-sex f a c t o r s c o r e s makes computing o f the v a r i a b l e s l e s s E q u a t i o n V I I i s the same as e q u a t i o n V without  complex.  the WAGE v a r i a b l e s .  T h i s e l i m i n a t i o n produces an e q u a t i o n w i t h s i g n i f i c a n t r e g r e s s i o n coefficients for a l l five variables. minimizes  The s m a l l number o f v a r i a b l e s  the amount o f d a t a c o l l e c t i o n and computing r e q u i r e d .  t h e r e i s a drop (adjusted R  2  However,  i n the o v e r a l l e x p l a n a t o r y power o f the e q u a t i o n  = 0.742).  E q u a t i o n V I i s a compromise between e q u a t i o n s V and V I I .  The  WAGE v a r i a b l e s are excluded but the age-sex f a c t o r s c o r e s are i n c l u d e d . 2 The  adjusted R  v a l u e i s improved by o n l y 3 p e r c e n t and s t i l l  only 3 of  the 9 age-sex f a c t o r s c o r e s a r e s i g n i f i c a n t . Thus the s e l e c t i o n o f the " b e s t " e q u a t i o n i s a t r a d e - o f f both i n s t a t i s t i c a l and p r a c t i c a l terms.  E q u a t i o n IV has the h i g h e s t a d j u s t e d R  (0.800) and s i x t e e n e x p l a n a t o r y v a r i a b l e s scores).  2  ( i n c l u d i n g t h e 9 age-sex f a c t o r  However, e i g h t o f these v a r i a b l e s are not  significant.  E q u a t i o n V I I , on the o t h e r hand, has o n l y f i v e e x p l a n a t o r y v a r i a b l e s 2 which are a l l s i g n i f i c a n t . T h i s i s o f f s e t by a reduced R (0.742). T a b l e 4.6 g i v e s a s i m i l a r range o f e q u a t i o n s as T a b l e 4.5 w i t h 2 CASEX as the dependent v a r i a b l e .  E q u a t i o n I has a h i g h a d j u s t e d R  v a l u e o f 0.897 b u t o n l y s i x o f the e i g h t e e n r e g r e s s i o n c o e f f i c i e n t s a r e significant.  I n e q u a t i o n I I , EDRAT was dropped because o f i t s h i g h 2 c o r r e l a t i o n w i t h BDCFR. The r e s u l t was a s i m i l a r a d j u s t e d R (0.898)  Table 4.6. CASEX Equations with Information Theory Case Complexity  I  Adjusted R F  2  0.897  II 0.898  III 0.899  IV 0.887  and S p e c i a l i z a t i o n  V 0.897  Variable  VI 0.884  54.83  58.60  62.71  125.93  69.76  169.87  13119.36  12995.04  12898.32  14375.63  13195.25  14829.80  16312.68 13.77*  16282.39 13.85*  16421.80 14.37*  16396.71 15.94*  16111.57 14.09*  15909.57 15.57*  7.59 2.07*  8.47 3.41*  8.56 3.47*  10.41 4.60*  8.27 3.34*  10.08 4.42*  460.01 4.16*  460.51 4.19*  455.31 4.17*  464.07 4.42*  416.78 3.84*  401.58 3.90*  WAGE1 t  156.27 1.27  158.94 1.30  176.42 1.51  145.62 1.29  WAGE2 t  463.57 1.58  457.48 1.57  429.01 1.50  542.19 1.93  -285.43 -0.57  -267.49 -0.54  MSE  INVCFR t BDCFR t OCC t  OUTXPD t EDRAT t  461.34 0.33  CMPXC1 t  1252.43 5.04*  1244.31 5.06*  1191.95 5.29*  1133.88 9.37*  1217.67 5.40*  1181.32 10.31*  SPCLCl t  69.93 4.66*  70.43 4.74*  69.95 4.73*  84.16 9.79*  71.79 4.90*  82.29 9.89*  F  1  9  Constant t  *  F  1 i s sig.  1 is sig.  1 is sig.  -1860.02 -4.95*  -1852.76 -4.97*  -1821.11 -4.96*  I n d i c a t e s s i g n i f i c a n c e a t 0.05 l e v e l .  2 are s i g . -1884.45 -5.69*  -1199.47 -6.32*  -1173.57 -9.61*  124  but no change i n the number of s i g n i f i c a n t c o e f f i c i e n t s .  In e q u a t i o n  2 I I I , both EDRAT and OUTXPD were e x c l u d e d — a d j u s t e d  R ..remained unchanged  at 0.899; s i x of the f i f t e e n r e g r e s s i o n c o e f f i c i e n t s were s i g n i f i c a n t . In e q u a t i o n IV, the age-sex f a c t o r s c o r e s were removed t o g e t h e r w i t h EDRAT and OUTXPD.  The  r e s u l t was  a s l i g h t drop  (1 p e r c e n t ) i n the  2 adjusted R to 0.887, w i t h f i v e of the seven c o e f f i c i e n t s p o s i t i v e . E q u a t i o n VI was the same as e q u a t i o n IV except the two i n s i g n i f i c a n t 2 v a r i a b l e s , WAGE1 and WAGE2, were e x c l u d e d . almost The  The  adjusted R  remained  the same (0.884) and a l l f i v e c o e f f i c i e n t s were s i g n i f i c a n t .  age-sex f a c t o r s c o r e s were r e t u r n e d i n e q u a t i o n V w i t h no  signifi-  cant i n c r e a s e i n e x p l a n a t o r y power (0.897) but an i n c r e a s e i n the number of i n s i g n i f i c a n t c o e f f i c i e n t s from zero to  seven.  Once a g a i n the s e l e c t i o n of the " b e s t " e q u a t i o n i s a t r a d e - o f f among competing, or non-independent, c r i t e r i a . E q u a t i o n I I I has the 2 h i g h e s t a d j u s t e d R but both the WAGE v a r i a b l e s are i n s i g n i f i c a n t and e i g h t of the n i n e age-sex f a c t o r s c o r e s are i n s i g n i f i c a n t . E q u a t i o n VI 2 has a s l i g h t l y .lower R s i g n i f i c a n t and  v a l u e but a l l f i v e independent  variables  l e s s e f f o r t i s r e q u i r e d f o r data c o l l e c t i o n  are  and  computing. 4.3.3.  A p p l i c a t i o n of the e s t i m a t e d c o s t e q u a t i o n to the budgeting The  last  process s e c t i o n p r e s e n t e d a number of a l t e r n a t i v e equa-  t i o n s which c o u l d be used  i n the budget s e t t i n g p r o c e s s .  t h a t e i t h e r e q u a t i o n IV or V I I i n T a b l e 4.5 be reimbursed be used  be used  I t was  proposed  i f h o s p i t a l s are t o  on a c o s t per day b a s i s or equations I I I or V I , T a b l e  i f h o s p i t a l s are t o be reimbursed  on a c o s t per case  basis.  4.6  125.  For purposes o f i l l u s t r a t i o n here, we l o o k a t how a c o s t p e r case equation  (equation  process.  I I I , T a b l e 4.6) c o u l d be i n c o r p o r a t e d  i n t o the budget s e t t i n g  This equation i s :  CASEX = -1821.11 + 16421.80 INVCFR + 8 . 5 6 BDCFR (-4.96) (14.37) (3.47) + 1191.95 CMPXC1 + 69.95 SPCLC1 + age-sex f a c t o r scores (5.29) (4.73) (1 i s s i g n i f i c a n t ) + 176.42 WAGE1 + 429.01 WAGE2 + 455.31 OCC (1.51) (1.50) (4.17) R  2  = 0.899  MSE = 12898.3  From t h i s e q u a t i o n i t i s p o s s i b l e t o compare t h e a c t u a l c o s t o f a h o s p i t a l with i t s predicted cost.  ( P r e d i c t e d c o s t here means the average c o s t p e r  case t h a t i s p r e d i c t e d i f t h e h o s p i t a l i s o p e r a t i n g  as an "average" A l b e r t a  h o s p i t a l h a v i n g taken account o f d i f f e r e n c e s i n s i z e , u t i l i z a t i o n , case mix, age  o f p a t i e n t s , wages.) T a b l e 4.7 shows how t h i s comparison can be made.  pital, Y.  F o r a p a r t i c u l a r hos-  the a c t u a l c o s t p e r case Y i s compared w i t h t h e p r e d i c t e d c o s t p e r case  The d i f f e r e n c e between the a c t u a l and p r e d i c t e d c o s t A=  r e l a t i v e d i f f e r e n c e A/Y can a l s o be seen.  Y - Y, and t h e  From t h i s one c a n i d e n t i f y t h e  h o s p i t a l s which a r e r e l a t i v e l y more expensive o r r e l a t i v e l y l e s s expensive. (The percentages i n column 5, T a b l e 4.7,  with, a n e g a t i v e  the h o s p i t a l exceeded i t s p r e d i c t e d costs).. a t i n g a t a l e v e l which i s 20 p e r c e n t case.  sign i n d i c a t e that  Some o f these h o s p i t a l s a r e oper-  above t h e i r p r e d i c t e d average c o s t p e r  S i m i l a r l y t h e r e a r e a number o f h o s p i t a l s which a r e o p e r a t i n g  t h e i r p r e d i c t e d c o s t s , as i n d i c a t e d by the p o s i t i v e s i g n . are o p e r a t i n g  a t a l e v e l which i s 10 p e r c e n t  below  Thirty hospitals  o r more below p r e d i c t e d  costs.  126  T a b l e 4.7.  A c t u a l and P r e d i c t e d Cost p e r Case i n 112 A l b e r t a  Hospitals  A c t u a l and P r e d i c t e d Cost p e r Case i t a l No.  A c t u a l Cost Y  Predicted Y  Cost  Difference Y - Y  Y - Y pel Y  1  534  584  +50  +9.4  2  888  748  -140  -15.8  3  745  810  +65  +8.7  4  875  791  -84  -9.6  5  637  663  +26  +4.1  6  742  705  -37  -5.0  7  774  821  +47  +6.1  8  586  620  +34  +5.8  9  1010  890  -120  -11.9  10  530  605  +75  +14.1  11  957  1084  +127  +13.3  12  969  1056  +87  +9.0  13  1757  1907  +150  +8.5  14  768  733  -35  -4.7  15  1384  1317  -67  -4.8  16  1307  1327  +20  +1.5  17  1030  986  -44  -4.4  18  632  703  +71  +11.2  19  544  575  +31  +5.7  20  641  693  +52  +8.1  21  694  520  -174  -25.1  22  687  690  +3  +0.4  23  496  637  +141-  +28.4  24  399  465  +66  +16.8  25  698  739  +41  +5.9  26  778  610  -168  -21.6  27  485  594  +109  +22.5  28  524  483  -41  -7.8  Actual and Predicted Cost per Case Hospital No.  Actual Cost Y  Predicted Cost Y  Difference Y -Y  Y - Y percent Y  29  465  612  +147  +31.6  30  845  729  -116  -13.7  31  723  651  -72  -10.0  32  2971  2944  -27  -0.9  33  1051  1057  +6  +0.6  34  989  982  -7  -0.7  35  967  1121  +154  +15.9  36  1770  1711  -59  -3.3  37  502  636  +134  +26,7  38  771  630  -141  -18.3  39  594  524  -70  -11.8  40  576  528  -48  -8.3  41  572  567  -5  -0.9  42  575  478  -97  -16.9  43  584  545  -39  -6.7  44  985  1076  +91  +9.2  45  1473  1220  -253  -17.2  46  476  431  -45  -9.5  47  735  664  -71  -9.7  48  895  951  +56  +6.3  49  694  744  +50  +7.2  50  551  617  +66  +12.0  51  765  662  -103  -13.5  52  663  519  -144  -21.7  53  745  674  -71  -9.5  54  1215  956  -259  -21.3  55  414  448  +34  +8.2  56  1159  1220  +61  +5.3  57  808  608  -200  -24.8  58  852  568  -284  -33.3  59  574  617  +43  +7.5  60  564  727  +163  +28.9  61  1730  1726  -4  -0.2  128  Actual and Predicted Cost per Case Hospital No.  Actual Cost Y  Predicted Cost Y  Difference Y - Y  Y - Y percent Y  62  505  484  -21  63  708  897  +189  +26.7  64  774  889  +115  +14.9  65  453  562  +109  +24.1  66  1120  1102  -18  -1.6  67  1660  1275  -385  -23.2  68  728  686  -42  -5.8  69  782  757  -25  -3.2  70  649  751  +102  +15.7  71  975  1146  +171  +17.5  72  927  898  -29  -3.1  73  964  911  -53  -5.5  74  476  536  +60  +12.6  75  828  917  +89  +10.7  76  802  627  -175  -21.8  77  451  512  +61  +13.5  78  771  806  +35  +4.5  79  406  569  +163  +40.1  80  724  644  -80  -11.0  81  531  584  +53  +10.0  82  994  866  -128  -12.9  83  503  572  +69  +13.7  84  624  622  -2  -0.3  85  520  577  +57  +11.0  86  347  491  +144  +41.5  87  851  810  -41  -4.8  88  792  738  -54  -6.8  89  650  594  -56  -8.6  90  647  633  -14  -2.2  91  573  566  -7  -1.2  92  709  769  +60  +8.5  93  525  605  +80  +15.2  94  826  723  -103  -12.5  ;  -4.2  A c t u a l and P r e d i c t e d Cost p e r Case H o s p i t a l No.  A c t u a l Cost Y  P r e d i c t e d Cost Y  Difference Y - Y  Y — Y percent Y  95  774  696  -78  -10.1  96  546  537  -9  -1.6  97  1465  1445  -20  -1.4  98  668  652  -16  -2.4  99  574  730  +155  +27.0  100  487  607  +120  +24.6  101  700  651  -49  -7.0  102  1000  998  -2  103  695  740  +45  +6.5  104  931  1026  +95  +10.2  105  516  656  +140  +27.1  106  844  805  -39  -4.6  107  601  555  -46  -7.7  108  755  667  -88  -11.7  109  562  588  +26  +4.6  110  569  724  +155  +27.2  111  860  943  +83  +9.7  112  1111  1143  +32  +2.9  -0.2  130  C l o s e r examination o f the h o s p i t a l s o p e r a t i n g l e a s t 10 percent  greater  than t h e i r p r e d i c t e d average c o s t per case  t h a t these were m o s t l y s m a l l h o s p i t a l s . costs involved i n maintaining  more i n t e r e s t i n g cases o f c o s t s and savings  o c c u r i n the l a r g e  We examined t h e i r  p r e d i c t e d c o s t s and c a l c u l a t e d the c o s t s o r s a v i n g s  operation.  than expected  small.  h o s p i t a l s , as they a r e the most expensive to r u n . and  revealed  As a consequence, .the i n d i v i d u a l  those h o s p i t a l s a t t h e i r h i g h e r  c o s t p e r case r a t e i s r e l a t i v e l y The  a t a l e v e l which i s a t  actual  as a r e s u l t o f t h e i r  Of the seven h o s p i t a l s i n the over 300 bed c a t e g o r y , three o f  them were o p e r a t i n g  a t a l e v e l i n excess o f t h e i r p r e d i c t e d c o s t s .  combined over-spending was c o s t i n g an e x t r a $3.5 m i l l i o n .  The f o u r remaining  h o s p i t a l s i n t h i s bed s i z e c a t e g o r y were o p e r a t i n g below t h e i r c o s t and a c t u a l l y s a v i n g a t 15.9 percent  $8 m i l l i o n .  One v e r y  Their  predicted  large h o s p i t a l , operating  under i t s p r e d i c t e d c o s t , was under-spending by $6.5  million. We then looked  a t another e i g h t h o s p i t a l s i n the 100-299 bed c a t e g o r y .  A s i m i l a r p a t t e r n emergedv-four h o s p i t a l s were o p e r a t i n g p r e d i c t e d c o s t s and f o u r were o p e r a t i n g  i n excess o f t h e i r  below t h e i r p r e d i c t e d c o s t s .  Those  h o s p i t a l s which were over-spending d i d so by a combined amount o f $2.5 million.  Those h o s p i t a l s which were under-spending were s a v i n g  in total.  When we l o o k a t the f i f t e e n l a r g e s t h o s p i t a l s t o g e t h e r ,  h a l f o f the h o s p i t a l s a r e o p e r a t i n g  a t a l e v e l which i s h i g h e r  a f t e r s t a n d a r d i z a t i o n f o r d i f f e r e n c e i n s i z e , case mix e t c . o f t h i s o v e r - s p e n d i n g i s about $6 m i l l i o n . operating imately  $4 m i l l i o n about one-  than p r e d i c t e d  The t o t a l  cost  Of the e i g h t h o s p i t a l s who a r e  a t a l e v e l below t h e i r p r e d i c t e d c o s t s , they a r e s a v i n g  approx-  $12 m i l l i o n .  The  general p o l i c y i m p l i c a t i o n s of t h i s a n a l y s i s are that  resources  131  from h o s p i t a l s o p e r a t i n g are o p e r a t i n g  i n excess should  below c o s t s .  The  be  r e d i s t r i b u t e d to h o s p i t a l s which  f i n a l method of d e t e r m i n i n g t h i s  i o n depends upon the p r o v i n c i a l governmenti  However, i t i s not  redistributproposed  t h a t budget requirements should  be determined s o l e l y on the b a s i s of  expected c o s t s , as p r e d i c t e d by  the r e g r e s s i o n a n a l y s i s .  i n conjunction  r u r a l h o s p i t a l s may  reducing  hardship  For i n s t a n c e ,  be m a n i f e s t i n h i g h e r  and  average l e n g t h s  these h o s p i t a l s may  of s t a y ,  taken i n t o c o n s i d e r a t i o n be  like  resources.  regression  o n l y be minor.  Some comments are d e s i r a b l e on the a b s o l u t e  amounts of e x p e n d i t u r e  s i g h t , i t appears t h a t the amounts are s m a l l by which  h o s p i t a l s are o v e r - or under-spending. of a l l A l b e r t a p u b l i c h o s p i t a l s was, Initially,  of r e s o u r c e s  so  remembered t h a t the most important  a n a l y s i s , so adjustments of t h i s n a t u r e should  million.  areas.  Factors  i n the f i n a l a l l o c a t i o n of  f a c t o r s a f f e c t i n g c o s t d i f f e r e n c e s have been i n c l u d e d i n the  At f i r s t  thus  o v e r a l l costs,  spend more than t h e i r urban e q u i v a l e n t s .  At the same time, however, i t should  involved.  small  i n c o n v e n i e n c e to p a t i e n t s l i v i n g i n o u t l y i n g  Higher average l e n g t h of s t a y u s u a l l y r e s u l t s i n h i g h e r  be  done  f u l f i l a broader s o c i a l r o l e than s i m i l a r s i z e d urban  T h i s may  t h i s should  I t should be  w i t h o t h e r budget review p r o c e s s e s i n c l u d i n g the p r o v i n c i a l  government's knowledge of the i n d i v i d u a l h o s p i t a l s .  hospitals.  the  The  t o t a l budget f o r the  f o r 1978-79, i n the o r d e r  operation  of $530  the amounts of money i n v o l v e d i n any r e d i s t r i b u t i o n  o f the o r d e r  of $20  m i l l i o n i s r e l a t i v e l y small i n r e l a t i o n  to  t h i s t o t a l budget. Nevertheless, present  one  should  not  draw the c o n c l u s i o n  f i n a n c i n g arrangements are g e n e r a l l y adequate.  too h a s t i l y The  that  above a n a l y s i s  i s s t r u c t u r e d to d e a l w i t h r e l a t i v e v a r i a t i o n i n c o s t a t t r i b u t a b l e to v a r i a t i o n i n case mix  etc.  By v i r t u e of the c h a r a c t e r  of r e g r e s s i o n a n a l y s i s ,  132  i n essence the e s t i m a t i o n  of a ' l i n e o f . b e s t  fit',  elements o f the c o s t  s t r u c t u r e remain unexplained-—not merely the u n e x p l a i n e d c o s t v a r i a t i o n contained costs.  i n the r e s i d u a l , but a l s o the e x i s t i n g a b s o l u t e  l e v e l s of h o s p i t a l  I t must be s t r e s s e d t h a t c o s t p r e d i c t i o n s based on case mix v a r i a t i o n s  cannot account f o r i n e f f i c i e n c i e s due to a d m i n i s t r a t i v e medical p r a c t i c e patterns  structures or varying  t h a t may be widespread i n the h o s p i t a l system.  Other means must be d e v i s e d  to t a c k l e i n e f f i c i e n c i e s from such s o u r c e s .  P o s s i b l e methods were l i s t e d i n Chapter 1. based on case mix v a r i a t i o n a r e I n n a t e l y  N e v e r t h e l e s s , a l l o c a t i o n formulae  c a p a b l e o f p r e d i c t i n g expected  changes i n h o s p i t a l c o s t s , and thus p r o v i d e a means to c o n s t r a i n p o t e n t i a l e s c a l a t i o n i n c o s t s due to u n n e c e s s a r i l y  c o s t l y developments i n the adminis-  t r a t i v e structure or medical p r a c t i c e . Moreover, the c o n s i s t e n t  a p p l i c a t i o n o f t h i s a l l o c a t i o n formula, such  t h a t the budgets o f r e l a t i v e 'overspenders' a r e reduced  (and i n a manner  than i s seen to be j u s t ) , ought to reduce the i n c e n t i v e o f h o s p i t a l s , e s p e c i a l l y major h o s p i t a l s , to demand s u b s t a n t i a l l y g r e a t e r would i n t u r n c o n t r i b u t e by r e d u c i n g  the 'leap  funds.  to a l l e v i a t i n g the e s c a l a t i o n o f t o t a l  f r o g ' element i n budget  requests.  This  expenditure  133  Reference Notes, Chapter 4  T h i s n e g a t i v e , i n s i g n i f i c a n t EDRAT c o e f f i c i e n t was unexpected because Evans and Walker (1972) and Barer (1977) found EDRAT t o be p o s i t i v e and s i g n i f i c a n t , i n d i c a t i n g t h a t e d u c a t i o n has an i n d i r e c t c o s t e f f e c t on i n p a t i e n t c o s t s . 2.  The RNI i s compared t o CMPXC1 w i t h the age-sex f a c t o r age i s a d j u s t e d f o r i n the c o n s t r u c t i o n of the RNI.  s c o r e s because  134  Chapter 5. Summary and C o n c l u s i o n This chapter, o f the p r e c e d i n g  though somewhat r e p e t i t i o u s , i s a s e l f c o n t a i n e d  b r o a d e r study.  summary  A c o n c i s e statement about the purpose,  method, r e s u l t s and i m p l i c a t i o n s o f the study p e r m i t s easy p e r u s a l by p o l i c y makers and government o f f i c i a l s , who may n o t be a b l e to read  the work i n i t s  entirety. H o s p i t a l c o s t containment has become a p r i o r i t y f o r p r o v i n c i a l governments i n Canada and r e i m b u r s i n g  a g e n c i e s i n the U n i t e d  States—a  consequence  of the d r a m a t i c r i s e i n the r a t e o f h o s p i t a l c o s t i n c r e a s e s over the l a s t f i f t e e n years.  This increase  ( d i s c u s s e d i n Chapter 1) i s t h e r e s u l t o f a  combination o f f a c t o r s , predominant o f which i s the i n c r e a s e i n r e s o u r c e use per p a t i e n t day.  T h i s means a more i n t e n s i v e use o f manpower, m e d i c a l  n o l o g y , l a b o r a t o r y t e s t s , drugs, e t c .  Obviously  tech-  the l e v e l o f r e s o u r c e use  v a r i e s f o r d i f f e r e n t cases, depending upon the n a t u r e o f the i l l n e s s and i t s severity.  Thus the problem f o r the p r o v i n c i a l government i s n o t o n l y a  r e d u c t i o n i n the r a t e o f i n c r e a s e o f h o s p i t a l c o s t s , but a l s o an e q u i t a b l e a l l o c a t i o n o f the a v a i l a b l e r e s o u r c e s account o f t h e i r d i v e r s e case mix.  t o the h o s p i t a l s , having  taken adequate  Approaches to the r e d u c t i o n o f the r a t e  o f i n c r e a s e o f c o s t s can be undertaken a t a h o s p i t a l , r e g i o n a l and p r o v i n c i a l level.  At the h o s p i t a l and r e g i o n a l l e v e l , c o s t containment can be attempted  through g l o b a l b u d g e t i n g , u t i l i z a t i o n review, peer review, i n d u s t r i a l e e r i n g , r e g i o n a l i s a t i o n o f s e r v i c e s and/or r e g i o n a l p l a n n i n g of s e r v i c e s .  Examples o f ways o f r e d u c i n g  engin-  and management  costs at a p r o v i n c i a l l e v e l  include  a r e d u c t i o n i n the number o f beds; s u b s t i t u t i o n o f some forms o f h o s p i t a l c a r e f o r cheaper a l t e r n a t i v e s ; a (from  change i n the method o f payment to p h y s i c i a n s  f e e - f o r - s e r v i c e t o s a l a r i e d o r s e s s i o n a l payment).  T h i s t h e s i s has  135  examined s p e c i f i c a l l y the i s s u e o f an e q u i t a b l e  d i s t r i b u t i o n of a v a i l a b l e  r e s o u r c e s t o the competing h o s p i t a l s , a problem a t the p r o v i n c i a l l e v e l . p a r t i c u l a r , i t has examined the problem o f s t a n d a r d i z i n g  In  f o r the h e t e r o g e n -  eous n a t u r e o f the h o s p i t a l p r o d u c t , s u g g e s t i n g a method o f reimbursement t h a t i s not based on a f l a t r a t e p e r case o r per day f o r a l l h o s p i t a l s , but t h a t takes case mix v a r i a t i o n a c r o s s approach has c o s t s a v i n g p r o c e s s no l o n g e r  hospitals into consideration.  i m p l i c a t i o n s because i t means t h a t the reimbursement  needs to be ad hoc and i n c r e m e n t a l .  for  informed d e c i s i o n s  of  resources.  to be made on the a p p r o p r i a t e  Rather i t a l l o w s l e v e l and d i s t r i b u t i o n  Chapter 2 reviews methods o f measuring output i n h o s p i t a l n c o s t In e a r l i e r s t u d i e s , s t a n d a r d i z a t i o n occurred ies  according  formed. on  to the number o f s e r v i c e s o r f a c i l i t -  I t was assumed t h a t h o s p i t a l output was  rel-  t o the range o f f a c i l i t i e s a v a i l a b l e so t h a t h o s p i t a l s i n each group had  an homogeneous output. als  studies.  f o r v a r i a t i o n i n h o s p i t a l output  by grouping h o s p i t a l s a c c o r d i n g  a v a i l a b l e a t the h o s p i t a l .  ated  This  A s l i g h t v a r i a t i o n o f t h i s method was to group h o s p i t -  t o the numbers o f s p e c i f i c s e r v i c e s o r procedures a c t u a l l y , p e r -  T h i s approach t o s t a n d a r d i z a t i o n  was an attempt to compare h o s p i t a l s  the b a s i s o f u t i l i z a t i o n o f s p e c i f i c s e r v i c e s r a t h e r than on the b a s i s o f  the a v a i l a b l e s t o c k o f f a c i l i t i e s o r s e r v i c e s .  The b a s i c assumption here was  t h a t each h o s p i t a l ' s output was r e l a t e d t o the q u a n t i t y These two b a s i c assumptions o v e r s i m p l i f y  o f s e r v i c e s performed.  the way h o s p i t a l s o p e r a t e .  One  cannot assume t h a t the u t i l i z a t i o n o f a s e r v i c e o r f a c i l i t y w i l l be the same for  a l l h o s p i t a l s merely because the s e r v i c e o r f a c i l i t y e x i s t s i n the  hospital.  Nor can one assume t h a t the presence o f c e r t a i n f a c i l i t i e s o r a  c e r t a i n number o f s p e c i f i c s e r v i c e s o r procedures performed w i l l r e s u l t i n a s i m i l a r case mix a t each h o s p i t a l . Standardization  o f output i n terms o f case mix p e r se seemed a b e t t e r  136  approach than r e l y i n g on p r o x i e s such as the presence o r absence of ies  and  services.  Diseases  development of the I n t e r n a t i o n a l C l a s s i f i c a t i o n o f 1  Adapted allowed  techniques (i)  The  t h i s to occur  i n a s y s t e m a t i c manner.  have been used to s t a n d a r d i z e f o r case mix  theory which ranks h o s p i t a l s a c c o r d i n g to the complexity the assumption t h a t the more c o n c e n t r a t e d  A number o f  variation including  f a c t o r p r o p o r t i o n s o f d i a g n o s i s or s p e c i a l t y groupings;  ( i i ) information  of cases based upon  cases are more complex;  Resource Need Index which ranks h o s p i t a l s a c c o r d i n g measured i n terms of average charge d a t a . of Diseases  facilit-  The  to case mix  (iii)  the  complexity  International Classification  Adapted (ICDA) has been used as the b a s i s f o r o b t a i n i n g the  n o s t i c groupings f o r each of these approaches to case mix  diag-  standardization.  More r e c e n t l y , an a l t e r n a t i v e c l a s s i f i c a t i o n scheme has been developed, which attempts to group diagnoses a c c o r d i n g are c a l l e d D i a g n o s i s  to r e s o u r c e u t i l i z a t i o n .  R e l a t e d Groups (DRGs) and  a t i o n i s average l e n g t h of s t a y .  These groups  the proxy f o r r e s o u r c e . ' . u t i l i z -  Thus diagnoses w i t h i n a Major D i a g n o s t i c  Category a r e d i f f e r e n t i a t e d on the b a s i s of t h e i r l e n g t h of s t a y .  These DRGs  can be used i n c o n j u n c t i o n w i t h c o s t i n f o r m a t i o n or i n f o r m a t i o n theory  to  rank h o s p i t a l s a c c o r d i n g  and  to t h e i r case mix  complexity.  disadvantages of each of these approaches to case mix d i s c u s s e d i n Chapter  The  advantages  s t a n d a r d i z a t i o n are  2.  In i t s e f f o r t s to c o n t a i n h o s p i t a l costs,- the government of A l b e r t a r e s o r t e d to the r e d u c t i o n of h o s p i t a l budgets i n r e a l terms. the government was  f a c e d w i t h more h o s p i t a l s  appealing  t h e i r budget a l l o c a t -  i o n s , c l a i m i n g they c o u l d not operate w i t h i n the s e t l i m i t s . was  familiar—"We  which was  T h e i r argument  should r e c e i v e a l a r g e r budget than h o s p i t a l X because  have a much more complex The  As a consequence,  government had  we  caseload". l i t t l e defence f o r i t s method of r e s o u r c e  p r i m a r i l y based on l a s t y e a r ' s  allocation,  c o s t s w i t h a f a c t o r added f o r  137  inflation.  I t c o u l d not a c c u r a t e l y compare h o s p i t a l performance and  because i t had no s y s t e m a t i c way across h o s p i t a l s .  costs  o f s t a n d a r d i z i n g f o r d i f f e r e n c e s i n case mix  The budget a n a l y s t s saw the Resource Need Index  (RNI),  developed by CPHA, as a p o t e n t i a l t o o l to a s s i s t them i n t h i s p r o c e s s . The Resource Need Index i s d e s c r i b e d i n d e t a i l i n Chapter 2. it ing  Basically  i s an index (to two d e c i m a l p l a c e s ) t h a t i s used to rank h o s p i t a l s a c c o r d to t h e i r case mix c o m p l e x i t y .  A l l cases a r e a l l o c a t e d to one o f 3490  m o r b i d i t y c a t e g o r i e s d e f i n e d i n terms o f 349 d i f f e r e n t d i a g n o s e s , 5 age and whether  o r not s u r g e r y was performed.  a weight d e r i v e d from average charge d a t a .  groups  Each m o r b i d i t y c a t e g o r y i s a s s i g n e d The r e l a t i o n s h i p between the a v e r -  age charge f o r a l l p a t i e n t s and the c e l l average g i v e s the r e l a t i v e v a l u e f o r that c e l l .  The Resource Need Index f o r a h o s p i t a l i s determined by m u l t i p l y -  ing  the number o f p a t i e n t s i n any one c e l l by the v a l u e f o r t h a t c e l l  the  Resource Need U n i t s f o r t h a t c e l l ) then summing a c r o s s a l l c e l l s and  i d i n g by the t o t a l number o f p a t i e n t s .  (called div-  Thus h o s p i t a l A which has an RNI o f  2.00 uses on average twice as many r e s o u r c e s per case as h o s p i t a l B which has an RNI o f  1.00  The main c r i t i c i s m o f the RNI approach to case mix s t a n d a r d i z a t i o n i s i t s b a s i c assumption t h a t average h o s p i t a l charges a r e a proxy f o r average hospital costs.  Charges do not n e c e s s a r i l y r e f l e c t a c t u a l c o s t s because i n  most American h o s p i t a l s t h e r e i s a c e r t a i n amount o f c r o s s s u b s i d i z a t i o n o f c o s t s between v a r i o u s departments.  There i s a l s o c r o s s s u b s i d i z a t i o n o f p a t -  i e n t s w i t h Blue Cross payers s u b s i d i z i n g Medicare o r M e d i c a i d p a t i e n t s .  Fur-  thermore, the RNI has never been used i n the Canadian s e t t i n g , so the assumpt i o n t h a t American charge data was. a good proxy f o r Canadian h o s p i t a l had n o t been  costs  tested.  The government o f A l b e r t a r e q u e s t e d an e v a l u a t i o n o f the Resource Need Index.  T h i s was  the i n i t i a l r e q u e s t t h a t prompted  t h i s study.  As a means to  138  t h i s e v a l u a t i o n , i t was case mix  d e c i d e d to.compare the RNI  complexity i n t h e i r a b i l i t y  l y f o r case mix v a r i a t i o n . and Walker (1972) was  The  and another measure o f  to s t a n d a r d i z e h o s p i t a l output  i n f o r m a t i o n theory approach developed  differences  elsewhere  U.S.  The i n f o r m a t i o n theory approach to case mix s c r i b e d i n d e t a i l i n Chapter  2.  standardization i s also  B r i e f l y , i n f o r m a t i o n ".theory can be used  a c c o r d a v a l u e to a h o s p i t a l which r e f l e c t s the case mix hospital.  by Evans  chosen as the s t a n d a r d f o r comparison because o f i t s  c o n s i s t e n t , good performance i n a c c o u n t i n g f o r case mix i n Canada and the  accurate-  R e l a t i v e weights  L i s t ) were predetermined  f o r 188  deto  complexity o f the  d i a g n o s t i c c a t e g o r i e s (Canadian M o r b i d i t y  on the b a s i s of the assumption  t h a t the r e l a t i v e  c o n c e n t r a t i o n o f a d i a g n o s t i c c a t e g o r y i s a measure of i t s r e l a t i v e  complexity.  An index f o r each h o s p i t a l i s d e r i v e d by m u l t i p l y i n g the number of p a t i e n t s i n a h o s p i t a l i n each d i a g n o s t i c c a t e g o r y by the r e l a t i v e weight o f t h a t d i a g n o s t i c c a t e g o r y , summing a c r o s s a l l c a t e g o r i e s and d i v i d i n g by the t o t a l number o f p a t i e n t s f o r the h o s p i t a l .  H o s p i t a l s can then be ranked a c c o r d i n g to t h i s  index of case mix  An average h o s p i t a l has a v a l u e o f  complexity.  The methodology used i s d e s c r i b e d i n Chapter case mix  3.  to compare these measures of case mix  1.00. complexity  To summarize: the i n f o r m a t i o n theory measure of  c o m p l e x i t y o r the Resource Need Index was  e q u a t i o n a l o n g w i t h a number o f o t h e r independent p i t a l s i z e , c a p a c i t y , wage l e v e l s , s k i l l mix  included i n a regression variables  (measures o f hos-  o f non-medical s t a f f a t t e n d i n g  p a t i e n t s , o u t p a t i e n t a c t i v i t y , t e a c h i n g a c t i v i t y ) to a s s e s s the e x t e n t to which i t c o u l d e x p l a i n the dependent v a r i a b l e s - — a v e r a g e i n p a t i e n t c o s t per case o r per day.  The r e s u l t s i n Chapter 4 show t h a t the RNI  i s not as good a  p r e d i c t o r o f h o s p i t a l c o s t s as the i n f o r m a t i o n theory measure.  When the  RNI  v a r i a b l e i s i n c l u d e d i n the r e g r e s s i o n e q u a t i o n , t o g e t h e r w i t h the o t h e r i n dependent v a r i a b l e s , i t adds o n l y 7 p e r c e n t to the e x p l a n a t o r y power o f the  139  e q u a t i o n e x p l a i n i n g v a r i a t i o n s i n average c o s t per day, explanatory case.  On  and  8 percent  power of the e q u a t i o n e x p l a i n i n g v a r i a t i o n s i n average c o s t  the o t h e r hand, when the i n f o r m a t i o n  c o m p l e x i t y i s added to the e q u a t i o n  theory measure of case  ( r e p l a c i n g the RNI),  the  23 p e r c e n t ,  and  When the age-sex f a c t o r s c o r e s a r e added,* a f u r t h e r 11 p e r c e n t i s explained,  average c o s t per c a s e .  This i s f a i r l y  theory  approach to case mix  and  per  mix  i s increased  t h a t f o r v a r i a t i o n s i n average c o s t per c a s e , by 16  i n average c o s t per day  the  explanatory  power of the e q u a t i o n f o r v a r i a t i o n s i n average c o s t per day,  ion  to  a f u r t h e r 8 percent  by  percent.  of v a r i a t i o n  of v a r i a t i o n  c o n c l u s i v e evidence t h a t the  s t a n d a r d i z a t i o n i s s u p e r i o r to the  in  informatResource  Need Index. Having e s t a b l i s h e d the r e l a t i v e s u p e r i o r i t y of the i n f o r m a t i o n measure o f case mix  c o m p l e x i t y , we  can suggest how  information  theory  theory can  be  used to improve the h o s p i t a l budget s e t t i n g p r o c e s s i n A l b e r t a . E s s e n t i a l l y i t can be used to e v a l u a t e  the r e l a t i v e c o s t s of h o s p i t a l s  a f t e r s t a n d a r d i z a t i o n f o r d i f f e r e n c e s i n s i z e , case mix factors.  and  return  The  (HS-1  and  can be o b t a i n e d  HS-2).  The  independent v a r i a b l e s ( d e s c r i b e d  s p e c i a l i z a t i o n v a r i a b l e s , from the PAS  r e c o r d of p a t i e n t i n f o r m a t i o n  codes d i a g n o s i s  C l a s s i f i c a t i o n of D i s e a s e s Adapted (ICDA) and 188  broad d i a g n o s t i c c a t e g o r i e s  according  i n Chapter  per  to the  theory  case mix  This  International into  List).  theory  3)  abstract.  groups t h i s i n f o r m a t i o n  (Canadian M o r b i d i t y  Barer (1977) showed t h a t the i n f o r m a t i o n weights were v e r y  as i t has  f o r a l l h o s p i t a l s from the h o s p i t a l annual  from t h i s s o u r c e , o r , i n the case o f the i n f o r m a t i o n  c o m p l e x i t y and  other  dependent v a r i a b l e s , average i n p a t i e n t c o s t  per case can be o b t a i n e d  case mix  a number of  T h i s can be done u s i n g r e g r e s s i o n a n a l y s i s i n the same way  been done i n t h i s study. day  and  complexity  s t a b l e over time i n d i c a t i n g t h a t a h o s p i t a l ' s case  140  mix  does not change s i g n i f i c a n t l y  from one year t o the n e x t .  Therefore  the case mix weights developed here do n o t need t o be computed each y e a r and can be used i n subsequent  years with r e v i s e d cost estimates.  R e g r e s s i o n a n a l y s i s a l l o w s the budget e x t e n t t o which the independent or p e r day.  a n a l y s t s to determine the  v a r i a b l e s e x p l a i n average c o s t p e r case  I t a l s o enables them t o i d e n t i f y h o s p i t a l s which a r e  r e l a t i v e l y more expensive o r r e l a t i v e l y l e s s expensive than would be expected g i v e n t h e i r c h a r a c t e r i s t i c s o f s i z e , u t i l i z a t i o n , case mix. T a b l e 4.7 shows how t h i s comparison c o s t h o s p i t a l s can be made.  and i d e n t i f i c a t i o n o f h i g h and low  Thus c o r r e s p o n d i n g adjustments  to i n d i v i d u a l h o s p i t a l budgets  can be made:  so as u l t i m a t e l y to a c h i e v e a more e q u i t -  able d i s t r i b u t i o n , o f resources o v e r a l l . T h i s study and i t s f i n d i n g s has a number o f important  policy  implications: (i)  The a p p l i c a t i o n o f s t a t i s t i c a l t e c h n i q u e s used here has been shown  to make an important c o n t r i b u t i o n t o the budget techniques can thus make a d e s i r a b l e (ii)  s e t t i n g p r o c e s s ; such  i n p u t • i n t o the p o l i c y m a k i n g p r o c e s s .  I n f o r m a t i o n t h e o r y can be used to develop case c o m p l e x i t y  v a r i a b l e s which r e a l i s t i c a l l y r e p r e s e n t case mix v a r i a t i o n i n h o s p i t a l s . These v a r i a b l e s a l l o w budget  a n a l y s t s and p o l i t i c i a n s t o address the  key i s s u e of s t a n d a r d i z i n g h o s p i t a l output t o take account o f case mix d i f f e r e n c e s — a fundamental  step towards d e v e l o p i n g a system o f r e s o u r c e  a l l o c a t i o n s t o h o s p i t a l s t h a t i s both e f f e c t i v e and e q u i t a b l e . (iii)  There a r e o n l y a l i m i t e d number o f h o s p i t a l parameters  whose  measurement i s n e c e s s a r y f o r the e f f e c t i v e i n c o r p o r a t i o n o f t h i s i n t o the budget  s e t t i n g process.  approach  T h e r e f o r e i t can be a c h i e v e d a t  minimum c o s t and i s a p o l i t i c a l l y v i a b l e s o l u t i o n to a complex and  141  difficult (iv)  problem.  P o l i c y makers may  peril.  continue to n e g l e c t t h i s process at t h e i r  Changes are o b v i o u s l y needed t o the c u r r e n t ad hoc,  own  incremental  approach t o budget s e t t i n g , which denies an a c c u r a t e comparison of hospital  c o s t s , i f c o n f l i c t between h o s p i t a l s and r e i m b u r s i n g  i s to be avoided. effective  The  c u r r e n t pragmatic  than the procedure  approach w i l l  described i n this  study.  agencies  always be  less  •142  Reference  1.  Notes, Chapter  5  As age i s a d j u s t e d f o r i n the c o n s t r u c t i o n of the RNI, i t i s p l a u s i b l e to compare the e x p l a n a t o r y power of the RNI to the e x p l a n a t o r y power of the i n f o r m a t i o n theory complexity v a r i a b l e (CMPXC1) t o g e t h e r w i t h the age-sex f a c t o r s c o r e s .  143  Bibliography  A l b e r t a H o s p i t a l s and M e d i c a l Care (1980). 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