A new approach to hospital cost functions and some issues in revenue regulation.
Date of Pub
Pauly, Mark V
An important aspect of hospital revenue regulation at the State level is the use of retroactive allowances for changes in
the volume of service. Arguments favoring non-proportional allowances have been based on statistical studies of marginal cost,
together with concerns about fairness toward non-profit enterprises or concerns about various inflationary biases in hospital
management. This article attempts to review and clarify the regulatory issues and choices, with the aid of new econometric
work that explicitly allows for the effects of transitory as well as expected demand changes on hospital expense. The present
analysis is also novel in treating length of stay as an endogenous variable in cost functions. We analyzed cost variation
for a panel of over 800 hospitals that reported monthly to Hospital Administrative Services between 1973 and 1978. The central
results are that marginal cost of unexpected admissions is about half of average cost, while marginal cost of forecasted admissions
is about equal to average cost. We obtained relatively low estimates of the cost of an "empty bed." The study tends to support
proportional volume allowances in revenue regulation programs, with perhaps a residual role for selective case review.
Costs and Cost Analysis : Reimbursement Mechanisms : Comparative Study : Facility Regulation and Control/economics : Hospitalization/economics
: Models, Theoretical : Regression Analysis : Support, U.S. Gov't, Non-P.H.S. : United States