HD28
.M414
no.
1613-
ALFRED
P.
WORKING PAPER
SLOAN SCHOOL OF MANAGEMENT
MEASUREMENT OF HOSPITAL PERFOR^IANCE
AND IMPLICATIONS FOR ACCCOUNTING
H. David Sherman
WP 1673-85
July 1985
MASSACHUSETTS
INSTITUTE OF TECHNOLOGY
50 MEMORIAL DRIVE
CAMBRIDGE, MASSACHUSETTS 02139
LIEASUREMENT OF HOSPITAL PERFOR>IANCE
AND IMPLICATIONS FOR ACCCOUNTING
H. David Sherman
WP 1673-85
July 1985
AUG
9 1985
RECEIVED
Abstract
Do for profit hospitals (FPs) perform better than non profit
hospitals (NPs) and will continued growth of FPs help contain the
alarming increases in U.S. health care costs? Three hospital performance dimensions that need to be considered to address these questions are identified:
quality of care, cost of care, and pricing.
Existing studies provide ambiguous and conflicting evidence about
relative hospital performance partly due to inadequate output mix and
volume data and partly due to incomplete and non-comparable accoutning
data.
A research design is proposed to provide more definitive conclusions about the relative performance of FPs vs. NPs.
Specific
changes in hospital accounting methods disclosures are also proposed
to make accounting data useful in managing and containing health care
costs.
Acknowledgment
thank Jon Chilingerian for his assistance in completing earlier
research that gave rise to many of the ideas reflected in this paper.
Valuable comments and suggestions from participants in the University
of Illinois at Chicago Government and Non-prof j.t Research Symposium
and, particularly. Professor James Chan are most deeply appreciated.
I
1
INTRODUCTION
.
Rising health care costs and the increased presence of for-profit health
service organizations have motivated frequent comparisons of for-profit (FP)
non-profit
and
managed, more efficient,
offered
those
to
Alternatively,
do
Does
hospitals.
(NP)
more
the
for-profit
altruistic
hospitals
profit and return on investment objectives?
investor
perspective
motive
profit
result
better
in
lower cost hospital services of comparable quality
by
the
the
(Frost
continue to be highly recommeded
sacrifice
quality
hospitals?
achieve
to
FPs have performed well from an
1982). (Sandomir,
Sullivan,
and
non-profit
1981
investments by security analysts
of increased competition and rate regulation (Hull,
FPs
).
in spite
Can NPs improve
1985).
their performance by adopting management practices of the FPs?
Are the tax
advantages and government subsidies to NPs warranted?
These
Federal
concern
issues
State
and
governments,
which
regulate
aspects of health care and which fund the cost of Medicare services
elderly and Medicaid
services
poor.
the
to
Legislators
must
to
the
periodically
reconsider whether tax subsidies provided to NPs are well placed, or whether
these
advantages
should
also
made
be
available
for
and
Employers
FPs.
For
insurers have also expressed great concern about rising medical costs.
example,
Chrysler Corporation reported that its health insurance costs were
$6,000
per
employee
which
1983,
in
was
double
the
cost
1979
(Rosenbaum, 1984).
While FPs account for only about 10% of all U.S. hospital beds, they own
more than 20% of the hospital beds in the high growth Sunbelt region of the
U.S.
growth
Moreover,
for
remarkable
increased
NPs
the FP growth
during
disparity
presence
of
in
number of beds was 64% compared with
(American
1970'
s
has
spurred
FPs
will
Hospital Association,
much
provide
controversy
a
way
to
about
contain
1982).
whether
hospital
17%
This
the
costs
whether
and/or
they
controversy is debated
confrontation
numerous articles,
in
(Siafaca,
and
1984)
(Altman,
e.g.
attention.
questioned the propriety of Humana Corporation's
editorials
this
(Dolnick,
1984)
examples
recent
public
considerable
While
quality.
care
notable
Two
1981).
attracted
have
health
compromise
will
of
this
First,
many
FP hospital
(a
chain) sponsoring of a vigorous artificial heart implantation program in its
Louisville
University's
teaching
Hospital
chain.
(Altman,
teaching hospital
Second
1984).
McLeans,
hospital,
psychiatric
the
Corporation of American (HCA)
of
the
largest
to
failed due
Harvard
sale
FP
the opposition
to
by health care professional at the institution.
of
hospitals
naturally raises accounting questions about measurement of costs.
Are they
purpose
intended?
Interest
in
consistent,
reliable,
Much of
cost
the
accounting
statements.
within
need
to
sets
of
data available
While these
any industry,
generally
verifiable,
information
compare
performance
comparing
and
to
relevant
questions
are
financial
hospital
fund
prepare
to
present
in
statements
accounting
accepted
methods
and
accounting
disclosure
principles
costs
the
is
from
the
financial
external
are
complicated
business
by
the
have differing
that
requirements.
for
derived
comparing organizations
for-profit and non-profit institutions
many cases are required to follow S.E.C.
use
for
compare hospitals
used
systems
relative
and
The
FPs
enterprises
follow
and
reporting standards as well.
accounting and are guided by accounting principles
for
in
NPs
hospitals
(AICPA,
or accounting policies for governments which own them (AICPA,
1972)
1972 and 1974).^
Differing
meaningful
before
among
standards
reporting
comparisons
need
To
what
made.
be
can
hospitals
these
do
What changes
issues will be addressed
These
reporting requirements are needed?
extent
performance?
differences hinder the comparison of hospital
reconciled
be
to
in
in
this
paper as follows:
Section II will posit a model
dimensions
relevant
the
of
hospital
of
performance and consider the extent to which these dimensions are dependent
on
accounting
describe
the
methodological
suggest
measurements
progress
problems
research
a
performance
of
to
date
design
to
The
hospitals.
more
section
IV
revisions to current hospital accounting and reporting standards
the
will
relative
the
recommends
briefly
and
,
Section
investigate
fruitfully
concluding
will
NPs
and
encountered.
limitations
and
FPs
comparing
in
III
Section
disclosures.
and
a
set
of
that would
facilitate the comparability for data of all types of hospitals.
II.
Three
about
DIMENSIONS OF HOSPITAL PERFORMANCE
key dimensions
hospital
of
operations:
performance
1)
derive
quality
of
health
in
comparing
the
performance
presents complex measurement problems.
current
the
care,
2)
concerns
efficiency and
All three dimensions need to be
cost of services, and 3) price of services.
considered
from
of
hospitals
and
each
dimension
Many of these problems clearly fall
Generally, municipal hospitals follow the Hospital Audit Guide
(AICPA, 1982) but due to the separation of certain costs allowed
under municipal accounting, the municipal hospital may have cost
disclosures that are inconsistent or incomplete compared with
For example, hospital employee pensions and other
private NPs.
fringe benefit costs may be accounted for in municipal trust funds
rather than in the hospital enterprise fund and some hospital
management costs have been found to appear outside of the municipal
hospital statement in other fund categories.
within the accounting disciplines, others are primarily addressed by health
specialists),
(physicians, nurses, and public health
care professionals
and
many can benefit from interdisciplinary cooperation.
Quality of Health Care
A.
Quality of care
in
and
the health
financial
judgmental dimension resides
the most
,
care professionals'
managers
due
are
consequences
economic
the
to
concern of accountants
The
disciplines.
entirely
almost
medical
of
decisions.
Quality
diagnoses
of
and
care
can
treatment and b)
quality
treatment
physicians,
segmented
be
depends
nurses and
patient's
the
on
into
satisfaction.
professional
the
as well
technicians,
lab
effectiveness
the
a)
of
the
Diagnosis
and
capabilities
of
the
available technologies.
as
Licensing and accreditation standards assure that most hospitals meet
some
minimum quality standard in terms of the capabilities of the professionals,
This minimum standard is
and available diagnostic and treatment facilities.
not adequate to evaluate hospitals,
above
this
minimum.
The
key
problem
of quality
there are wide ranges
since
is
any
that
equally
two
respected
physicians will not necessarily agree on and prescribe the same diagnostic
and
tests
treatment
any
for
particular
one
Hence
patient.
two
very
different sets of treatments may both be considered to be of equal quality.
Attempts
have
limitations
clear
procedures
eye
recently been made
for
cataract
success
such
a
their
to
and
open
that
the
within
judgment.
contrast,
surgery,
standardize
ultimate
a
heart
moderate
the
have
surgery,
required
procedures
degree
treatment
treatments,
For
success.
variety of frequently performed
predetermined
In
to
of
an
illness
surgical
e.g.
with
some
resource
variation
can
needs
based
that
are
operations,
standardized
of
there
example,
surgical
been
and
but
does
on
be
physician
not
require
such as treatment of arthritis and cancer are much more difficult
each
type
measure.
because
cost
The
differences
of
not
similar quality
of
providing
technology
intensity of
likely
as
be
to
in
physician
judgments
diagnosing and
for
may differ
care
of
differences
and
Higher quality may be more costly
technologies used.
more advanced
is
and
Hence this dimension of quality is difficult
possible in the near future.
to
standardization
and
required,
care
of
procedures,
agreement on the timing,
to gain professional
this means
if
patient
treating a
the
in
using
illness
or
using more intensive care to treat a patient.
Another
of diagnosis
facet
—
some established standard
aspect
This
establishment
within
treatment
and
quality
licensing
with
controllable
operating procedures
diagnosis
of
correcting errors can be more costly.
directly
more
is
standard
of
facets
two
that
quality
of
not,
If
attainment of
the
is
prescribed tests performed accurately and
are
effectively the first time?
treatment quality
and
the
have
and
Note
hospital.
identified
been
Increases in quality raises cost in the former case and reduces cost
here.
in the latter case.
An entirely different dimension of hospital quality relates
Does
satisfaction.
pleasing?
How
the
rapidly
taste
food
respond
nurses
do
good?
hospital personnel polite and supportive?
hospitals'
hotel
This
care.
functions,
dimension
evaluated in completing
The
1)
complexity of
of
distinct
as
quality
also
to
the
environment aesthetically
institutions,
and
the
from
their
impacts
provision
of
needs
and
costs
quality dimension of performance
which
3)
the
These aspects of quality focus on
medical
to
be
the
only
use
of
2)
the lack of
except for the minimum standards
identifies
weak
manifest by
is
the lack of any available ranking of hospitals by quality,
accreditation
Are
call?
patient's
a
an assessment of hospital quality.
any generally accepted measure of quality,
for
Is
patient
to
particularly
surrogates
such
as
low
mortality
quality
rates.
malpractice suits, and accreditation in hospital studies.
From an accounting perspective,
and
efficiency,
among
differences
fee
issue
the
the extent
is
hospitals
are
to which
due
cost,
quality
to
differences?
Cost and Efficiency
B.
Efficiency can be segmented into four distinct components, each of which
impacts cost.
1.
Input
efficiency
price
depends
on
the
ability
hospitals'
buy
to
each input (good or service) at the lowest cost.
2.
Allocative efficiency requires
to minimize cost.
that
For example,
a
the mix of
it
(LPNs)
may
and
utilization
of
(RNs)
licensed practical
and
At
therefore be price efficient.
employing
be
more
services provided.
a
higher
higher
adjusted
be
hospital may be paying the lowest
possible salary for registered nurses
nurses
inputs
RN
priced
LPN
to
RNs
than
same time
the
resulting
ratio
needed
are
Allocative inefficiency results
in
the
for
in higher cost
due to the input mix.
3.
Technical efficiency
to
the use of the minimum amount of each input
is
produce desired care.
provide the same services
A technically inefficient hospital could
it
provides with fewer inputs regardless
of their relative price and consequently could reduce its operating
costs.
Technically efficient
efficient
production
hospitals would
frontier
and
may
at
be
the
operating on
the
time
be
same
inefficient
with
dimensions.
This dimension of efficiency
is
difficult
efficient production frontier
is
not
because
the
hospitals,
respect
to
price,
allocative,
and
to
scale
measure
defined
well
for
largely because of the professional judgment associated
with prescribing the tests and treatments required for
a
particular
(See for example (Sherman,
patient illness.
Scale efficiency requires
4.
be
at
increase
or
decrease
service
apply
an
hospitals,
to
any hospital
beds,
also be scale
cost
per
has
that
concept
achieved
outpatient
and
care
difficult
is
services
e.g.
may
number
bed
may
size
services
like
provided
be
to
provided.
optimal
the
optimal
an
at
higher
in
inefficient on other dimensions,
surgery
heart
open
an
focused on determining
While much research has
of
which
level
the
numerous
are
there
since
the
result
economic
elementary
of each activity of
i.e.,
would
volume
in
This
unit.
level,
optimal
hospital
the volume
that
1984).
at
a
suboptimal volume level.
through accounting
All of these efficiency dimensions can be addressed
managers,
financial
controllers,
Indeed,
disciplines.
of
directors
and
hospitals have been responsible for making decisions that impact efficiency,
increasing
mix
hospital,
of
size
e.g.
awareness
the
of
and
personnel,
of
need
technical
patients
in
from
a
Recent
and
hospital beyond
the
physician's desire
pressures
reimbursement
under
inefficiencies
to
Medicare
health
on
have
care
for added
hospitals
fixed
a
the
fee
professionals
in
payment
each
for
The
results
claims.
a
diagnosis
efforts
such
of
from
financial
cooperation between
result
This may
changes
from
keeping
and
protection against malpractice
hospital
professionals.
an
tests
minimum time needed.
resulting
motivated more
care
excessive
ordering
by
is
There
rates.
For example, the physician can
these decisions, but progress has been slow.
generate
health
include
to
wage
cost
treated
managers
are
only
beginning to have an impact on efficiency and cost.
Underlying any consideration of cost and efficiency is the issue of how
to
measure
volume
of
output.
Ultimately
some
cost
service measure is needed to fairly compare hospitals.
per
adjusted
unit
of
Such a measure must
fairly reflect resource intensity of the unit of care e.g.
care
day of
could be due
either
to
inefficient
higher cost per
a
complex
treatment or more
patient illnesses requiring greater resource utilization.
The case mix and mix of other services provided by each hospital needs
to
explicitly
be
cost
accounting,
only now being seriously addressed
is
and
cost
hospital
the
in
This proves to be an acute problem in comparing hospitals due to
industry.
difficulty
the
relative
about
The need to measure output mix, which is basic
efficiency can be developed.
to
conclusions
before
considered
encountered
in
categorizing
diagnoses
patient
by
their
resource needs and the limited availability of appropriate output mix data.
C.
Pricing
distinct
is
Pricing
because
cost
from
it
directly
There are two dimensions
regardless of the cost structure of the hospital.
of pricing that require attention in hospital
First,
assessment.
services
different
fees
generally
controlled
identical
for
price sensitive
—
allow
by
hospitals
the
in
because
services
Doctors
physicians.
same market
have
they tend to select hospitals
area
incentive
little
for
have
to
decision
purchase
the
The nature
1982).
selectively set fees with higher margins (Lewin, et al.,
health care
hospitals
There is evidence to suggest that FPs
may take different markups over cost.
of
payors,
impacts
other reasons
is
to
be
such as
quality, location, and availability of beds.
In the hospital
schedules
and
industry,
depend on
the
For example, most private
Blue
Cross
generally
pays
schedules.
adjustments.
fixed
a
These
In
payor
and
generally
fee
discounts
addition
to
the
nature of
lower
and
a
without
generally
contractual
fee;
regard
referred
adjustments
to
to
and
formal
fee
arrangement.
fee
pay
pay
8
the
self-pay patients
established
are
from the
earned are distinct
insurers and
Medicaid
and
fees
full
fee;
Medicare
now
hospitals'
fee
the
as
bad
contractual
debt
losses,
many hospitals provide varying amounts
Hence a hospital which appears to have
fees earned.
actually
may
volume
of
care which
free
of
charging
be
free
less
its
for
Consequently,
care.
a
services
fair
higher
a
impact
comparison
large
a
hospital
of
net
schedule
fee
provide
they
if
also
fees
requires that the payor mix as well case mix be considered.
COMPARING THE PERFORMANCE OF FP AND NP HOSPITALS
III.
Research Findings
A.
While there is concern that quality of care may be sacrificed to enhance
profits, studies of FP vs. NP hospitals have not found ascertainable quality
differences
Neuhauser,
been measured
Quality has
.
of
incidence
1970),
malpractice
possession
claims,
and
(Steinwald
accreditation
by:
high
of
prestige technology, existence of suspect practices (Clark, 1980), and death
rates
1977).
(Bays,
access
equity
to
purchase
markets,
capital
suggested
that
allowing
thereby
equipment
state-of-the-art
of
been
also
has
It
them
FPs
1981).
(Riffer,
and
NPs
need
both
that ownership
dimensions
heatlh
of
these studies,
i.e.
of the diagnosis,
part
(Also
II.
(Dumbaugh,
1978),
care
quality
broader
much
than
those
1983).
tested
to
The
in
treatment and patient satisfaction dimensions discussed in
for
see,
and
than those noted above,
existing
are
quality
the surrogates for quality do not capture the complexity
studies.
example,
(Donabedian,
of quality are more rigorous,
of
high
(Sherman and Chilingerian,
)
attracting
induce physicians
type or corporate control can
.compromise quality (J. Harris,
by
the
There is no current
levels that satisfy physicians or risk losing patients.
evidence
finance
to
maintain
to
greater
(Frost and Sullivan,
physicians and increasing the types of care available
1982),
share
quality
promote
to
FPs
it
To
(Steinwald
However,
1978).
compehensive
,
and
Neuhauser,
unless
measurable,
1970),
new definitions
and widely accepted
would be difficult to advance beyond the results
ascertain
whether
cost
and
pricing
differences
betwen FPs and NPs are primarily due
differences
to
accounting
in quality,
researchers must await further development in the health care disciplines.
studies
efficiency
and
Cost
FPs
of
NPs
vs.
frequently
most
have
addressed the dollar cost aspect of hospital care, mirroring the concern for
Such studies have been less concerned with comparisons of the
rising costs.
Research findings about
dimensions of operating efficiency described above.
FP
NP.
vs.
differentials
cost
methodological
data
and
problems.
evidence about relative hospital
per day than FPs
lower cost
(Pattison
1982),
Vraciu,
chains
(1983)
have
FPs
and
cost
per
find
lower
per
measuring
the
cost
admission
per
Lutz,
and
cost
(Pattison and Katz,
FP
1982)
that
chain
studies
time period.
from its
on
tax
similar
costs
NP
independent
198 0),
studies
(Sloan and Vraciu,
lower
and
that
FP
Studies
FPs'
results:
approximately
1979) and above NPs'
In addition,
but
FPs.
and
conflicting
yielded
(Clark,
day
per
al.,
Sloan
1973).
al.,
et
(Lewin et
1974),
same
the
1982)
(Lewin et al.,
that have segregated chain
1982)
than
(Bays,
NPs';
in
found
1979) have
(Coyne,
while
One possible source of conflicting conclusions is
not
all
examine
the
same
hospitals
during
same
the
However, this would not account for all the differences.
Four basic
fully adjust
have
admission were
per
do
NPs
(Bays,
found the opposite.
these
(Ruchlin
below NPs
1S8 3).
cost
and
also
from independent hospitals
that
1983)
admission
1982),
(Berry,
1980),
than
conflicting
provide
they
basic
of
Several studies found that NPs had
costs.
day
were
(Sloan and Vraciu,
addition,
In
(Clark,
because
inconclusive
are
problems weaken hospital
for
legal
exempt
cost differences
status.
debt,
availability
of
tax
expenditures,
and
the
due
cost
to
These advantages
the
exemption
deductible
value
of
from
the
NPs'
include
income
donations
for
donated services.
10
First,
studies.
cost
lower
and
they
advantages
interest
property
capital
Second,
and
the
do
not
arising
rates
paid
taxes,
the
operating
price
level
associated with
effects on depreciation and borrowing costs
capital
asset
purchases
and
contracts
lease
have
been
not
timing of
the
considered.
Third, the length of time that a FP chain owns a new hospital and its effect
hospitals
on
Sloan
ignored
been
have
cost
in
most
studies.
Becker
and
found that when chain FPs acquire less efficient FP or NP hospitals,
(19S4)
their costs decreased with the amount of time the hospital has been part of
Finally,
chain.
the
the
mix
case
not
is
explicitly
Most
considered.
studies
use the number of services offered as a case mix surrogate.
in Bays,
(1979) and Berry,
tax
and price
subsidies,
case
level
would have
effects
difficult
been
but
Case mix data is only now becoming available on a limited basis.
possible.
As
(1974) are case mix severity indices developed to
Correcting for the cost differences due to interest
control for output mix.
and
Only
mix
data
becomes
increasingly
available,
fruitful
more
and
definitive research on hospital costs will be possible.
Differences in price, scale, technical and allocative efficiency between
FPs vs. NPs have only begun to be addressed in the literature.
Such studies
are significant for identifying the types of management techniques that are
associated, with these cost differences.
Studies that used operating ratios to measure efficiency have found that
FPs are more efficient
equivalents
of
.
personnel
Lewin et al.
For example,
per
patient
to
efficient scheduling and job allocation.
lower
assets
fixed
admissions
per
patient
per
bed,
that
but
be
personnel
in
full-time
suggesting more
FPs,
They also found that FPs utilized
Coyne
day.
lower
found
(1982)
(1982)
utilizations
greater
found
FPs
have
are
not
significantly
different among hospital types (FPs vs. NPs, and chains vs. independents).
These studies
they
may
provide
exist
failed
little
and
to make
insight
whether
such
into
specific case mix adjustments.
the
nature
differences
11
are
of operating
really
due
Moreover,
differences
to
the
that
management
One exception to this is Wilson and
practices in the NP vs. FP environment.
Jadlow's
study (1982)
utilization
hospital
of
a
techniques."
management
"good
of
set
be more
to
Sherman and Chilingerian (1983)
efficient in resource utilization than NPs.
examined
FPs
which found the
on nuclear medicine,
They found that FPs made greater use of shared services, bidding procedures
for
purchasing,
forecasting
demand
other
and
management
business
basic
Decisionmaking by health care professionals did not appear to
techniques.
differ, but the study is not sensitive enough to conclude on this key issue.
Researchers
regardless
evidence
have
of whether
FPs
that
whether
questioned
services
the
NPs
(Lewin
services,
for
There
costly.
than
markups
higher
apply
more
are
more
charge
FPs
appears
1982).
al.,
et
be
to
However, whether FPs have higher fees depends on their relative costs, i.e.,
if FPs have lower costs and higher markups,
FPs
found
were
Vraciu,
to
and
(Pattison
1983)
charges
higher
have
Katz,
found to be lower in chain FPs,
and NPs
(Sloan and Vraciu,
payor mix
The
payor mix
services
at
affects
rates
1983),
The
the
charges,
day
per
(Lewin,
charges
but
1982),
offering
a
set
of
various
standard
services
findings
payors
fee
for example (Brown,
above studies and,
1983).
1981)).
to
these
of
contract
There
schedules.
attract
a
to
studies.
for
pay
some
is
their hospitals
patient
case
mix
and
al.,
1973)
This, however, has been denied by some FPs
(see,
payor mix that will maximize profits
(Sloan and Vraciu,
were
for case mix and
lack of adjustment
inconsistent
since
below hospitals'
select
admission
per
evidence that FPs practice cream skimming e.g. by locating
and
and
(Sloan
with no difference between independent FPs
1983).
further complicates
they may still have lower fees.
(Bays,
1977),
(Ruchlin et
These mix factors are not controlled for in the
consequently, a definitive answer about relative fees is
unavailable.
There
is
a
great need
to
rely
heavily
12
on
accounting
data
as
well
as
other data not included in the financial
tried
correct
to
inconsistencies
data
for
been
generally
not
Consequently,
accounting
and
disclosure
Partly
due
to
their
analysis.
firm
produced
emotional
on
conclusive actionable research
B.
The
limitations
the role and impact of FPs
been
not
date
fees,
and
of
focus
a
to
studies
costs,
researchers.
have
not
operating
their
impact
qualitative
and
on health
judgements
are
costs
care
rather
than
.
Suggestions for Improvement
existing
in
relative
accounting
have
issues
problems,
the
and
NPs
relative merits of FPs vs.
based
by
the
This suggests that the public debate about the
efficiences of FPs vs. NPs.
primarily
data
about
conclusions
unavailability of data,
and
completed
have
studies
While researchers have
statements.
studies
and
increasing need
the
understand
to
the need
in the health care industry both suggest
for improved research.
The
following suggestions
are
offered
improve
to
research
intended
to
measure the relative performance of hospitals.
1.
The
segregation
chain/affiliate
addition,
contract
less
than
future
2.
s
the
of
5%
segment
growing
While
FPs.
number
that
independent
NPs
hospitals,
should
are
be
this
segregated
being
In
under
managed
currently
are
represents
from
the
hospital.
FP-managed hospitals
these
U.S.
of
acknowledge
should
types
non-chain
versus
increasing
an
by
hospital
of
FPs
a
and
distinct
NPs
in
tudie s.
Case mix and payor mix adjusted output data are needed for hospital
comparisons.
hospital
services
Case
mix measures
of
the
entire
patient
load
of
a
are needed to measure and compare the outputs and costs of
of
hospitals.
Medicare patients
The
data
(over 65 years
13
currently
old)
using
being
the
developed
Diagnosis
for
Related
Group
only
for
sensitive
resource
the
to
mix
case
developed
for
inpatient
care,
ages
and
types
all
sensitive
more
measures
In
volume
visit
outpatient
of
would
be
addition
to
need
patients.
of
types.
Ideally a measure
resource
to
ignored
Outpatients volume are essentially
needed.
the
their limitations need be
addressed to achieve valid hospital comparisons.
patient
of
patient
these
of
needs
While these are the best available data,
of
part
a
In addition, DRG classifications of patients are not
patient load.
highly
account
categories
patient
(DRG)
mix
and
in
are
studies
to
date; however, current developments are motivating an increased use
of
outpatient
making
facilities
output.
Additional
include
health
outputs
hospital
education
need
that
be
to
of
training
programs,
important
increasingly
an
this
considered
and
nurses,
training of medical students, interns and residents.
3.
data
will
accounting
and
Cost
implicitly
always
cost
assumed
be
subject
allocation
that
such
Most
systems.
problems
are
Health
Organizations,
Maintenance
clinics continue to evolve and the formal
health
care
boundary
of
providers
the
entity
increase.
being
This
costs among hybrid institutions.
The
this
may
nature of
the
standing
free
associations among these
raises
evaluated
and
have
studies
immaterial,
become an issue requiring more careful attention as
hospitals,
different
among
variations
to
and
about
questions
the
comparability
specific cost
the
of
identification
problems which require adjustment in future studies include:
a.
Inflation and specific price level adjustment:
that
asset
purchases
and
leases
are
the
contracted
different time periods, adjustments are needed.
14
To
extent
for
in
Lower
b.
rates
interest
associated
NP
with
exempt
tax
debt
financing.
c.
Property and income taxes waived for NPs.
d.
Tax
deductible
donations
and
donated
services
to
Th ^se
NPs.
contributions are unlikely to be evenly distributed among all
NPs.
When
e.
revenue measures
services,
the
reimbursement
used
are
mix of payors and
from payors
such
focus
to
fees
for
health
proportion of
different
the
as
on
Medicare and Medicaid need
to be considered.
can remunerate management with non-cash benefits
FPs
f.
such
as
stock options and stock purchase plans, which allows employees
These benefits understate
to buy common shares at a discount.
the true to FP salary costs.
After
the
above
adjustments
less efficient and
are
research may
made,
that government
subsidies
in
the
NPs
that
conclude
are
tax advantages
form of
are no longer justifiable because they are really promoting the survivial of
Alternatively,
inefficient hospitals.
as FPs,
that
but
education,
structures.
professionals
they provide valuable services
free
and
NPs
to
NPs may be
care
not
offered
may even be more
modify
the ir
able
behavior
by
such as
FPs
than FPs
in
found
teaching,
resulting
to
creative
as efficient
to be
in
influence
ways
to
community
higher
cost
health
care
reduce
health
care costs, because they seek to help the community rather than improve the
bottom line.
Without
studies
based on more complete data described above,
15
arewers to these public policy issues cannot be objectively ascertained.
IMPLICATIONS FOR ACCOUNTING
IV.
The data needed for more conclusive studies of FP versus NP performance
go
beyond
available and would require cooperation of both sets of
methods
Accounting/land disclosure requirements have differed between
those
institutions.
FPs
which
NPs
and
contribute
expanded disclosure
addition,
the
to
difficulty
comparisons.
such
of
for all hospitals
requirements
In
provide
could
the basis to understand better the cost of care in NPs vs. FPs.
More consistent and expanded disclosure requirements for NPs and FPs are
below
recommended
financial
their
make
to
more
statements
useful
in
analyzing the relative costs and fees.
Output Mix Data
1.
should be provided
expense
data
in
volume
for
disclosures are needed
of
kind
the
problem
schedule
of
number
of
case
to
Standardized
mix.
understand relative hospital
to
follows:
as
is
and
disclosure
of
allow users
form that will
a
and payor mix data
case mix
Output volume,
:
requirement
Hospitals
patient
would
days
volume
address
annually
include
patients)
(or
a
treated
example
One
the
mix
case
and
costs.
would
that
revenue and
adjust
mix
output
supplementary
DRG
each
in
A summary patient severity index would accompany this table which
category.
would be calculated by weighting each DRG by relative costs used by insurers
such
Medicare
as
reasonably
or
measure
some
relative
other
DRG
apply other measures of resource
relative dollar costs.
likely
to
be
the
generally
costs.
The
accepted
set
table
would
of
ve
ights
enable
intensity that may be more
users
sensitive
While DRGs have many well-documented flaws,
most widely available
case
mix measure
and
that
would
to
than
they are
be
the
most pragmatic choice until they are replaced by more sensitive measures of
case mix.
16
.
Price
2.
disclosure
s
Data
Level
following
to
distinguish
underlying
impact of
preferable
to
the
trends
in
of
operating
Consumer Price
more meaningful
a
basis
of
statement
Financial
Financial Accounting Standards Board are
Index,
adjust
to
from
specific
the
the
would be
adjustments
since
,
differ
which
costs
price
Such current cost data would
levels by cost type may differ substantially.
provide
Statement
the
Specific price level
inflation.
general
a
of
33
financial
adjusted
level
lines
the
along
Accounting Standard No.
needed
Price
:
compare depreciation costs.
and
supports the use of current cost
The American Hospital Association already
data, albeit for other reasons.
3.
Disclosures of the Impact of Restricted Funds and Donat^o^s
on NP Operations
services
and
funds
A key unknown issue
:
result
costs
operating
in
extent to which the donated
the
is
that
would
or
would
be
not
Management of NPs should be asked
incurred if these donations were absent.
to estimate and disclose the impact of these donations on
operating costs.
Disclosure of the Impact of Waived Property Taxes Income Taxes and
4
»
Tax-free Debt on Operations
:
The difference in tax free vs.
rates and the amount of waived property and
income
tax
corporate debt
should be estimated
and disclosed to provide a basis for estimating the cost subsidy provided to
NPs.
5.
are
Line of Business Disclosure
reported
currently
activities
encompased.
Corporate
care.
hospitals
should
are
at
to
segment
require
least
as
one
business.
of
line
Notably,
reporting
separate
segregate
Hospital revenues and operating costs
:
there
reporting
outpatient,
17
on
could
each
inpatient,
multiple
actuality,
inpatient
is
concepts
In
be
vs.
outpatient
applied
relevant
teaching,
to
segment.
and
all
This
research
The volume and case mix for each line of business
activities.
be provided for reasons discussed in
than corporate
detailed
Such disclosure would be much more
1.
business data because
line of
products
incorporate a wider group of activities,
category
segment
hopsital
than
here
proposed
is
owned by chain FPs are
s
should also
and/or
reported as
one
tends
services
in
For
hospitals.
for
latter
the
each
all
example,
business.
of
line
to
This
proposal would require further segregation of these activities.
Management Discussion and Analysis
6.
standards
require
segregate
price
operating
cost
organization's
management discussion
the
volume
from
increases
levels,
understand
short-
and
corporate reporting
The S.E.C.
:
analysis
and
understand
changes,
impact
liquidity
long-term
changes
in
the
assess
and
inflation
of
readers
help
to
Similar
pressures.
disclosures are needed for hospitals to make a comparison more meaningful.
Government-owned
7.
requirements
include
explicitly
should
Hospital
reporting
non-profit
hospitals.
-
Reporting
Hospital
government
Board
Close cooperation between the Financial Accounting Standards
Standards
Accounting
Government
consistency accross all
The
disclosures
is
is
required
above
proposed
disclosure
large
of
are
largely
outpatient
the
because
hospital.
the
Ijiri
the
notes
and
volume
that
accounting
fairness
fairness
for output disclosure
literature
non-profit
for
18
of
mix
reporting
is
is
reporting
One
notable
data.
Added
the
to
disclosure may damage the accountor vis-a-vis
At the same time, the need
in
(1982)
extensions
corporations.
publicly held
disclosures of this nature raise questions about
i.e.,
assure
to
the
non-profit and for profit hospitals.
standards now required of
exception
Board
and
a
its
accountor
key
concern
competitors.
explicitly acknowledged
organizations
(Financial
Standards
Accounting
Board,
198 1,
paragraphs
51-53).
hospitals,
the volume and mix of outputs are so basic
excluding
these
data
severely
constrict
the
In
the
case
of
to the operation that
of
usefulness
the
financial
statements in answering questions about relative costs and performance.
The
issue that must be addressed is whether the potential benefit to the public,
i.e. greater insights
e
into ways to contain and manage health care costs will
xceed the costs of added disclosure and competitive responses to these data.
The
than
accounting community has historically been
one
issues
of
leader
management.
such as
found
in
in
making
breakthroughs
Expanded and
those
more
on
consistent
proposed herein would help
existing
studies
about
relative
into a
management of health care costs.
19
health
statement
financial
resolve many of
performance
respect to the cost, efficiency and fee dimensions.
would begin to move accounting
follower
of
the
of
rather
care
cost
disclosures
ambiguities
hospitals- with
Such reporting changes
leadership role
in
dealing with
the
REFEREHCES
Altman, L. K., "Health Care as Business," New York Times, November 24, 1984
P.
1.
American Hospital Association, Hospital Statistics. 1981
,
Chicago, (1982).
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Hospitals, Inquiry Vol. XIV, March, 1977, pp. 17-21.
Bays, Carson W.
,
.
"Cost Comparisons of For Profit and Non Profit
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Bays, Carson W.
,
.
and Frank A. Sloan, "Hospital Ownership and Performance."
Becker, Edmund R.
Unpublished Report, 1984.
,
Berry. Ralph E.. "Cost and Efficiency in the Production of Hospital
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Quarterly
Fund
Services," Millbank Memorial
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,
Brown, Paul B., "Band-Aids by the Box Car." Forbes
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August 31, 1981.
Clark, Robert, "Does the Non-Prof it For Profit, Fit the Hospital
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,
Coyne, Joseph S.. "Hospital Performance in Multi-Hospital Systems: A
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,
Dolnick. E., "Debate Rages over For-Profit Hospital Care." Boston Globe
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Donabedian, Avedis, "The Quality of Medical Care." Scie nee
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,
Vol. 200.
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Anthony R.
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Frost and Sullivan, "The Proprietary Hospitals Management Industry in
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of
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Hull, J. B., "Hospital -Management Stock Prices Expected to Rise Despite
Pressures of Medicare, Insurers," Wall Street Journal (January 30, 1985),
p.
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Ijiri, Yuji, "On the Accountability Based Conceptual Framework in
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Profit Hospitals:
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,
New
,
Riffer, Joyce, "Merits of Not For Profit Hospitals - Investor Owned
Institutions Argued," Hospitals (June 16, 1961), pp. 17-26.
,
Rosenbaum, D. "Chrysler, Hit Hard by Costs, Studies Health Care Systems,"
New York Times March 5, 1984, p. 1.
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Ruchlin, Hirsch S., Dennis D. Pointer, and Lloyd L. Cannedy, "A
Comparison of For-Profit Investor-Owned Chain and Non-Profit Hospitals,"
Inquiry Vol. X, (December 1973), pp. 13-23.
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Siafaca, Ekaterini, Investor-Owned Hospitals and Their Role in the
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Sherman, H. David, "Hospital Efficiency Measurement and Evaluation,"
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,
Sherman, H. D. and J. A. Chilingerian, "A Look at the Myths and Half
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Sloan, Frank A. and Robert A. Vraciu, "Investor-Owned and Not For-Profit
Hospitals:
(Spring 1983),
Addressing Some Issues," Health Affairs
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,
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Steinwald, Bruce and Duncan Neuhauser, "The Role of the Proprietary
Hosptial," Law and Contemporary Problems
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,
Wilson, George W.
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,
,
21
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