We examined the relationship between variations in intra-DRG severity of illness classifications and hospital profitability. Unlike in previous studies, we created a direct hospital-level measure of severity, formed from MedisGroup severity scores. We estimated separate regression equations for total margin, operating margin, net revenue per admission, and expense per admission. We examined data for 201 Pennsylvania hospitals and found that hospital profits were inversely related to the severity of illness index. Expense per admission was positively related to severity; however the relationship between severity and net revenue per admission was not significant. The results suggest that hospitals with a more severe case mix may not recover the full costs of providing services. Thus payment reform should include adjustments for severity of illness.

IntroductionFor the past few years, the United States has been engaged in a public policy debate about how to reform the healthcare system to assure access to care while cost containment. Underlying the deliberations is a concern that quality and cost containment are a trade off that is, that efforts to contain costs inevitably result in lower quality of care. This concern may explain, in part, why the effort to pass reform legislation two years ago was not successful.However, quality health care was neither defined nor debated; the concepts and goals of cost containment were neither explored nor explained; and the relation between the two was never discussed. Therefore, the possibility that there is no direct relation or even an inverse relation between quality and cost containment was never raised. Without any public consensus about what is meant by either quality or cost containment, it is difficult to evaluate their relation to each other fairly.The relation between cost containment and quality is an issue of universal interest. In this paper, we present the issue in the United States and discuss why the concepts of quality and cost containment may be poorly understood. We evaluate how the managed care phenomenon affects public perceptions of the relation between quality and cost containment. And we propose a framework for discussions on future reforms that are based on our understanding and definitions of quality, cost, and cost containment. We think a better framework for discussion is necessary to reach a national consensus on reform of health care.

Crafting a payment mechanism for hospitals that provides for the legitimate operating needs of efficient institutions is an enduring health policy dilemma. The Prospective Payment System used by Medicare and some other payers in the US has been criticized for not adjusting for differences in severity of illness within diagnosis-related groups (DRGs). Previous studies have examined the relationship between profitability and severity of illness at the hospital level. This study examines the relationships between severity of illness and cost, revenue, and profit at the patient level. Two measures of severity (disease stage and number of unrelated diseases) were significant predictors of cost per case, and often had better predictive power than DRGs. In most instances, payers did not compensate adequately for severity so that higher values for the severity variables resulted in financial losses for the hospital.

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Cost-function analysis of hospitals has been criticized for not including severity adjustments. We tested a scalar hospital-specific severity index, derived from Admission MedisGroup Scores. Alternative versions (i.e., linear/nonlinear) of the index were evaluated by estimating cost functions on a sample of 201 Pennsylvania hospitals. The scalar index was a strong predictor of costs. The results also suggest that the omission of a severity variable in a hospital cost function may cause a specification error.

This study examined the determinants of compliance with clinical guidelines for glucocyte colony-stimulating factor (GCSF), a biotechnology product designed to reduce postchemotherapy infections. The pattern of compliance did change over time. After the guidelines were disseminated, appropriate use of GCSF increased. However, inappropriate use also increased. Patients who were younger and had an attending physician who was an oncologist or hematologist were more likely to receive GCSF whether they met the guideline criteria or not. Our findings suggest that older patients may be treated less aggressively than others and that physicians who are the most knowledgeable about guidelines may feel the most qualified to override the guidelines when they believe they do not apply. Our findings also demonstrate that it is easier to encourage physicians to do more for patients rather than less.

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