How much of the variation
in hospital financial
performance is explained by
service mix?
Presented by:
Richard Lindrooth
Medical University of South Carolina
Co-authors:
Jan Clement, Mei Zhao, Gloria Bazzoli
Virginia Commonwealth University
Hospital Finances and the Quality of Hospital Care
Agency for Healthcare Research and Quality
Grant #R01 HS13094
Research Objectives
• To explain and quantify how the distribution of hospital
financial performance is affected by:
•
•
•
•
service offerings,
payer mix or generosity,
ownership, and
operational decisions.
• Assess whether this relationship is consistent over time.
Background
• Service offerings are an important tool available to hospital
administrators that can be used to influence financial
performance.
• In contrast, hospital administrators can only manipulate payer or
payment generosity mix indirectly. Location, market conditions
etc.. are not easily changed without actually physically moving
a hospital or merging with a competitor.
Background
• Devers, Brewster, and Casalino (2003) suggest a ‘new medical arms race’
may be beginning. They trace the catalyst of the shift to less selective
contracting, capitated contracts, and the emergence of new competitors
(specialty hospitals and outpatient centers).
• We expect that between 1995-2000:
• The number and share of profitable services at the hospital will
explain a greater proportion of the variation later in the period.
• The effect of payer mix will decline relative to service offerings
throughout the period.
• The effect of ownership and non-service-related operational
decisions should remain constant.
The Distribution of Hospital Financial
Outcomes
•
H1: As importance of service offerings
increases, the distribution of financial outcomes
becomes wider.
If offering new and expensive services leads to
greater profitability, then hospitals with access to
capital to invest in these services will become
more profitable.
Hospitals with the easiest access to capital also
tend to be the most financially stable.
The Distribution of Hospital Financial
Outcomes
•
H2: As the importance of managed-care payer-mix
decreases, the distribution of financial outcomes will be
most affected at the top end of the distribution.
•
The decline of selected contracting would lead to
patients being more dispersed across markets, leading to
higher rates overall.
•
The bottom end of the distribution may be less affected,
because the payer mix at these hospitals is dominated by
charity care, Medicaid, and Medicare.
Data
• Same sample as previous presentations.
• The main difference is that we derive of measure of the
number of the 25 most profitable (and unprofitable) services,
and the hospital share of those services from the claims data.
• Profitability is defined based on:
The DRG Handbook: Comparative Clinical and Financial
Benchmarks 2003. Evanston, IL: Solucient, 2003.
Profitable and Unprofitable
Services
• Profitable:
• Coronary and Cardiac Services (DRG 104-107; 109-110; 112; 120;
123-125)
• Tracheostomy (DRG 483), and others
• Unprofitable:
• Cellulitis (DRG 477-478), GI Hemorage/Obstruction (DRG 174-175;
DRG 181) , Psychiatric and Substance Abuse (DRG 429-430; 434435), Hip & femur procedures (DRG 210-211; DRG 236)
• Based on Medicare Reimbursement. Many private insurers
pay based on a percent of Medicare. Thus, what is important
is the relative price, not the absolute price.
Trends in Hospital Margins, 1995-2000
15
10
10th
5
25th
0
50th
75th
-5
90th
-10
-15
1995
1996
1997
1998
Year
1999
2000
Trends in Hospital Cashflow, 1995-2000
25
20
10th
15
25th
50th
75th
10
90th
5
0
1995
1996
1997
1998
Year
1999
2000
Standard Deviation of Hospital Margin and
Cashflow, 1995-2000
12
10
8
Margin
6
Cashflow
4
2
0
1995
1996
1997
1998
1999
2000
Variables
• Services
•
•
•
•
Number of 25 most profitable services
Share of 25 most profitable services
Number of 25 most unprofitable services
Share of 25 most unprofitable services
• Payer
• Share of Medicare, Medicaid, Charity, Other, HMO penetration,
HHI, PC Income, Market beds per capita, Market occupancy rate
• Ownership
• For-profit, secular non-profit, religious non-profit, teach.
• Operations
• Staff per bed, Nurse per bed, RN pct, Adj Admissions, Total Beds.
Trends in Adjusted Partial R-Squared,
Margins-- 1995-2000
0.12
0.1
Ownership
0.08
Payer
0.06
Service
0.04
Operations
0.02
0
1995
1996
1997
1998
Year
1999
2000
Trends in Adjusted Partial R-Squared,
Cashflow--1995-2000
0.07
0.06
0.05
0.04
0.03
0.02
0.01
0
Ownership
Payer
Service
Operations
1995
1996
1997
1998
Year
1999
2000
Trends in Hospital Cashflow, 1995-2000
25
20
Dollars
10th
15
25th
50th
75th
10
90th
5
0
1995
1996
1997
1998
Year
1999
2000
Interquantile Regressions
• 25th Quantile versus 50th, 75th, and 90th
• Factors that lead to more dispersion:
• Charity Care, HHI
• Share of Profitable Services (75th , 90th)
• Per capita income
•
Factors that lead to less dispersion:
• Number of unprofitable and profitable services
• Medicare (75th and 90th)
• Beds per capita
• Results for cash flow similar, except per capita income
becomes less significant.
Interquantile Regressions
• 50th Quantile versus 75th, and 90th
• Factors that lead to more dispersion:
• Share of Profitable Services (75th , 90th)
•
Factors that lead to less dispersion:
• Number of profitable services
• Medicare (90th)
• Beds per capita
• Results for cash flow similar, except Medicare becomes
significant for the 75th percentile.
Conclusions
• Increases in charity care and Medicaid hurt the poor
performing hospitals more than others due decreasing returns
to treating these patients.
• The difference between poor performing and moderate
performing is also due to HHI. Moderately performing
hospitals are more likely to be able to take advantage of
higher HHIs in terms of higher reimbursement.
• Increases in the share of profitable services helps all
hospitals. However: increases in the share of profitable
services pushes the well/excellent performing hospitals up
further. This points to increasing returns to these services.
Significance
• The most profitable hospitals have a higher share of
profitable services. Increasing those shares will lead to even
more increasing profits unless they face new competition.
• We would expect more entry and increasing competition in
services with higher expected profitability. Hospitals that
specialize in the services will be extremely profitable. Is this
good? Given volume and financial performance
considerations? Can Medicare retain some of those rents?
• Increases in uninsurance (charity care) hurt poorly
performing hospitals the hardest.
• Do the trends point to a two-tiered health system?