The Association of Hospital Cost-Inefficiency With Certificate-of-Need Regulation

Abstract

Certificate-of-need (CON) regulations can promote hospital efficiency by reducing duplication of services; however, there are practical and theoretical reasons why they might be ineffective, and the empirical evidence generated has been mixed. This study compares the cost-inefficiency of urban, acute care hospitals in states with CON regulations against those in states without CON requirements. Stochastic frontier analysis was performed on pooled time-series, cross-sectional data from 1,552 hospitals in 37 states for the period 2005 to 2009 with controls for variations in hospital product mix, quality, and patient burden of illness. Average estimated cost-inefficiency was less in CON states (8.10%) than in non-CON states (12.46%). Results suggest that CON regulation may be an effective policy instrument in an era of a new medical arms race. However, broader analysis of the effects of CON regulation on efficiency, quality, access, prices, and innovation is needed before a policy recommendation can be made.

Characteristics of High- and Low-Efficiency Hospitals

“…Inpatient admissions (a proxy for discharges), postadmission days (i.e., total inpatient days minus total admissions), and outpatient visits are included as outputs in the cost function. Hospital outputs were treated as exogenous, an assumption common to hospital cost studies (Grannemann et al, 1986, Rosko & Mutter, 2014. Two inputs, labor and capital, are included in the cost function.…”

Efficiency and hospital effectiveness in improving Hospital Consumer Assessment of Healthcare Providers and Systems ratings

“…The results, although from a diverse group of states, are not necessarily generalizable to non-HCUP states. However, the mean values of variables reflecting size, ownership, and system membership of hospitals in the study states are very similar to those of all 50 states (Rosko & Mutter, 2014). Finally, because data on organizational age, namely, years since founding, are not readily available for hospitals, we did not test how age influences organizational effectiveness.…”

“…Following the methods of Rosko and Mutter (2014), we limited the study to hospitals located in the 37 states included in State Inpatient Databases through the HCUP. State Inpatient Database data support the inclusion of outcome (i.e., risk-adjusted mortality and patient safety events) and patient burden of illness measures when estimating efficiency scores, which allows us to control for output heterogeneity in the estimation process.…”

“…Efficiency: We used Stochastic Frontier Analysis (SFA) to estimate the cost-efficiency variable in our model. Since the seminal study by Zuckerman, Hadley, and Iezzoni (1994), over 27 SFA studies of U.S. hospitals have been published (Rosko & Mutter, 2014). Similar to Deily and McKay (2006), we used SFA estimates of cost-inefficiency to predict changes in one dimension of quality.…”

“…We closely followed the methods of Rosko and Mutter (2014) to estimate cost-inefficiency. Specifically, we used a simultaneous estimation model proposed by Battese and Coelli (1995).…”