Inefficiency Differences between Critical Access Hospitals and Prospectively Paid Rural Hospitals

Widener University.
Journal of Health Politics Policy and Law (Impact Factor: 1.37). 02/2010; 35(1):95-126. DOI: 10.1215/03616878-2009-042
Source: PubMed


The Medicare prospective payment system (PPS) contains incentives for hospitals to improve efficiency by placing them at financial risk to earn a positive margin on services rendered to Medicare patients. Concerns about the financial viability of small rural hospitals led to the implementation of the Medicare Rural Hospital Flexibility Program (Flex Program) of 1997, which allows facilities designated as critical access hospitals (CAHs) to be paid on a reasonable cost basis for inpatient and outpatient services. This article compares the cost inefficiency of CAHs with that of nonconverting rural hospitals to contrast the performance of hospitals operating under the different payment systems. Stochastic frontier analysis (SFA) was used to estimate cost inefficiency. Analysis was performed on pooled time-series, cross-sectional data from thirty-four states for the period 1997-2004. Average estimated cost inefficiency was greater in CAHs (15.9 percent) than in nonconverting rural hospitals (10.3 percent). Further, there was a positive association between length of time in the CAH program and estimated cost inefficiency. CAHs exhibited poorer values for a number of proxy measures for efficiency, including expenses per admission and labor productivity (full-time-equivalent employees per outpatient-adjusted admission). Non-CAH rural hospitals had a stronger correlation between cost inefficiency and operating margin than CAH facilities did.

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    • "Non-profit ownership is the reference category. Ownership variables are used to control for internal pressure for efficiency associated with ownership (Rosko and Mutter 2010a and 2010b). The effect of ownership on hospital efficiency should be consistent with Property Rights Theory (PRT) which argues that when property rights are not clearly specified, incentives to promote efficient behavior decline (Rosko 1999). "
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    ABSTRACT: This study analyzes difference in efficiency among the U.S. rural hospitals using a two-stage, semi-parametric approach. Data Envelopment Analysis is used in the first stage to calculate cost, technical and allocative efficiencies of Critical Access Hospitals (CAH) and non-CAH rural hospitals. Following Simar and Wilson (2007), bootstrapped truncated regressions are used in the second stage to infer on relationship between the cost, technical and allocative inefficiencies of hospitals and some environmental variables. The estimated results show that CAHs are less cost, technical and allocative efficient than non-CAH rural hospitals. The results also show that Medicare cost-based reimbursement for CAHs has a negative effect on the efficiency of these hospitals while Medicare prospective payment system for non-CAH rural hospitals has a positive effect on hospital efficiency.
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