Original Article Korean Journal of Preventive Medicine 1978;11(1): 123-127.
 Variation of Hospital Costs and Product Heterogeneity. Young Soo Shin ABSTRACT The major objective of this research is to identify those hospital characteristics that best explain cost variation among hospitals and to formulate linear models that can predict hospital costs. Specific emphasis is placed on hospital output, that is, the identification of diagnosis related patient groups (DRGs) which are medically meaningful and demonstrate similar patterns of hospital resource consumption. A casemix index is developed based on the DRGs identified. Considering the common problems encountered in previous hospital cost research, the following study requirements are established for fulfilling the objectives of this research: 1. Selection of hospitals that exercise similar medical and fiscal practices. 2. Identification of an appropriate data collection mechanism in which demographic and medical characteristics of individual patients as well as accurate and comparable cost information can be derived. 3. Development of a patient classification system in which all the patients treated in hospitals are able to be split into mutually exclusive categories with consistent and stable patterns of resource consumption. 4. Development of a cost finding mechanism through which patient groups' costs can be made comparable across hospitals. A data set of Medicare patients prepared by the Social Security Administration was selected for the study analysis. The data set contained 27,229 record abstracts of Medicare patients discharged from all but one short-term general hospital in Connecticut during the period from January 1, 1971, to December 31, 1972. Each record abstract contained demographic and diagnostic information, as well as charges for specific medical services received. The "AUTOGRP System" was used to generate 198 DRGs in which the entire range of Medicare patients were split into mutually exclusive categories, each of which shows a consistent and stable pattern of resource consumption. The "Departmental Method" was used to generate cost information for the groups of Medicare patients that would be comparable across hospitals. To fulfill the study objectives, an extensive analysis was conducted in the following areas: 1. Analysis of DRGs: in which the level of resource use of each DRG was determined, the length of stay or death rate of each DRG in relation to resource use was characterized, and underlying pattern of the relationships among DRG costs were explained. 2. Exploration of resource use profiles of hospitals; in which the magnitude of differences in the resource uses or death rates incurred in the treatment of Medicare patients among this study hospitals was explored. 3. Casemix analysis; in which four types of casemix-related indices were generated, and the significance of these indices in the explanation of hospital costs was examined. 4. Formulation of linear models to predict hospital costs of Medicare patients; in which nine independent variables(i.e., casemix index, hospital size, complexity of service, teaching activity, location, casemix-adjusted death rate index, occupancy rate, and casemix-adjusted length of stay index) were used for determining factors in hospital costs. Results from the study analysis indicated that: 1. The system of 198 DRGs for Medicare patient classification was demonstrated not only as a strong tool for determining the pattern of hospital resource utilization of Medicare patients, but also for categorizing patients by their severity of illness. 2. The weighted mean total case cost(TOTC) of the study hospitals for Medicare patients during the study years was $1127.02 with a standard deviation of$117.20. The hospital with the highest average TOTC ($1538.15) was 2.08 times more expensive than the hospital with the lowest average TOTC ($745.45). The weighted mean per total cost (DTOC) of the study hospitals for Medicare patients during the study years was $107.98 with a standard deviation of$15.18. The hospital with the highest average DTOC ($147.23) was 1.87 times more expensive than the lowest average DTOC($78.49). 3. The linear models for each of the six types of hospital costs were formulated using the casemix index and the eight other hospital variables as the determinants. These models explained variable to the extent of 68.7 percent of total case cost (TOTC), 63.5 percent of room and board cost (RMC), 66.2 percent of total ancillary service cost (TANC), 66.3 percent of per diem total cost (DTOC), 56.9 percent of per diem room and board cost (DRMC), and 65.5 percent of per diem ancillary service cost (DTANC). The casemix index alone explained approximately one half of inter-hospital cost variation; 59.1 percent for TOTC and 44.3 percent for DTOC. These results demonstrate that the casemix index is the most important determinant of inter-hospital cost variation. Future research and policy implications in regard to the results of this study is envisioned in the following three areas: 1. Utilization of casemix-related indices in the Medicare data systems. 2. Refinement of data for hospital cost evaluation. 3. Development of a system for reimbursement and cost control in hospitals.
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