Hospital costs and specialization: benefits of trimming product lines.

Trends in hospital specialization were studied using multiple regression analysis for the period 1991-2000. The observed 30.6 percent rise in specialization was associated with a 8.2 percent decline in unit cost per admission. Specialization was also associated with improved quality of care. Specialization has been highest in competitive West Coast markets and lowest in the rate-regulated states (New York and Massachusetts). Hospitals have less incentive to contain costs by decreasing the array of services offered in stringent rate-setting states. The term underspecialization is advanced to capture the inability of some hospitals to selectively prune out product lines in order to specialize. Such hospitals spread resources so thin that many good departments suffer. Unit cost per case (adjusted by diagnosis-related group) is higher in the less specialized hospitals.

Cost-effective potential for home health care.

This article discusses the cost-effective potential of home health care. A forward-looking managed care system might find home health care an increasingly cost-effective bargain. Why is home health care evolving into a better locus for patient care? The home health care facilities are reducing costs and prices in response to new pressures from consumers and new methods of prospective payment.

New ventures require accurate risk analyses and adjustments.

For new business ventures to succeed, healthcare executives need to conduct robust risk analyses and develop new approaches to balance risk and return. Risk analysis involves examination of objective risks and harder-to-quantify subjective risks. Mathematical principles applied to investment portfolios also can be applied to a portfolio of departments or strategic business units within an organization. The ideal business investment would have a high expected return and a low standard deviation. Nonetheless, both conservative and speculative strategies should be considered in determining an organization's optimal service line and helping the organization manage risk.

Willingness to pay in treatment of bleeding disorders.

This paper presents the results of a contingent valuation study measuring willingness to pay (WTP) for treatment of patients with von Willebrand's disease. Median WTP for treatment of this disorder was $1,500 or $3,500, depending on how the initial bid was structured. Regression analysis shows that income, education, and a category rating scale for health status were significant in predicting WTP. The adjusted annual WTP was $2,178. WTP surveys may increasingly be useful for health technology assessment. Starting point bias in how the bids are structured must be recognized.

Managing risk in a risky world.

A successful firm knows that its success depends on its knowledge of risk: what it knows and how quickly it can learn new approaches. The popularity of capitation managed care plans is in doubt in many areas, because the rate of innovation in risk adjustment is very slow. Managed care firms fear that implementation of severity adjustments by Medicare in the year 2000 could slash their Medicare rates. Methods to predict insurance risk must be retooled to prevent "cream skimming" discrimination against the sick, reduce stinting (undercare), and reward quality providers. Risk cannot be eliminated, but it can be prospectively analyzed, assessed, and hedged. In the coming world we must convi nce all concerned parties to spread the risks. Payers must take on some risk by paying for the research and development of valid and reliable severity adjustment systems, and they must pay a higher capitated amount for high-cost patients. A new mixed payment system of pure capitation plus prospective payment for high-risk high-cost patients will create a more equitable marketplace. If a health maintenance organization (HMO) does a great high-quality job of treating diabetes, acquired immunodeficiency syndrome (AIDS), or heart disease, it could advertise this fact and not be harmed financially by the resulting influx of high-cost patients.

Financial issues in defining levels for HIV/AIDS research.

This article outlines the issues in cost identification and fair payment for acquired immune deficiency syndrome (AIDS) research. Costs need to be better identified using activity-based costing methods to reveal the structural pattern of care. Patterns of care can be too expensive if they: (1) overutilize the hospital as the locus of care, or (2) underutilize prevention and education. Managers need to learn more about the cost identification issues payers face in designing a fair payment system. In the long run, more health care professionals would serve the cause of innovation and biomedical research if they all work together to define a stable fair funding mechanism. Payers need to learn that fair payment of indirect costs is not a bonus or a windfall profit.

Mortality rates as an indicator of hospital quality.

This study examines the relationship between outlier status based on adjusted mortality rates and theoretical underlying quality of care in hospitals. We use Monte Carlo stimulation to determine, in the absence of case mix variation, if random variation noise could obscure the signal of differences in underlying rates of quality of care problems. Classification of hospitals as "outliers" is done compared with "true" hospital quality, based on underlying rates for quality of care problems in mortality cases. Predictive error rates with respect to "quality" for both "outlier" and "non-outlier" hospitals are substantial under a variety of patient load and cutoff point choices for determining outlier status. Using overall death rates as an indicator of underlying quality of care problems may lead to substantial predictive error rates, even when adjustment for case mix is excellent. Outlier status should only be used as a screening tool and not as the information provided to the public to make informed choices about hospitals.

Nationwide EDI system can trim administrative costs.

Administrative costs related to the healthcare industry can be reduced dramatically through implementation of a nationwide electronic data interchange (EDI) system. Estimates suggest that such a system could trim $73 billion from the $220 billion spent annually in the United States on healthcare administrative costs by automating 11 transactions traditionally performed manually. The greatest potential for cost savings lies in the electronic conversion of enrollments, submissions, and payments.

Effects of price regulation on stock returns of publicly traded companies in the healthcare industry.

During the 1980s, governmental changes were enacted to suppress the rising costs of healthcare. The primary forms of legislation were the implementation of the Prospective Payment System (PPS), the passage of Deficit Reduction Act and the proposal to shift capital costs to a prospective payment system. The main emphasis of the study is to examine the price reaction of hospital management companies for the above governmental changes. Using an intervention analysis, the findings show that the market reacted negatively at the passage of PPS and the future proposal to implement capital costs on a prospective basis for hospital management companies. In addition, hospital management companies level of risk increased for all the key event dates.

Cost inflation and resource distribution in the Korean healthcare sector under national insurance.

In 1989, Korea finally implemented a universal national health insurance policy. However, the expansion in coverage has created a number of ongoing problems: a rapid demand-pull inflation in medical costs stimulated by the fee-for-service payment system and an increasing maldistribution of available resources. The author discusses the sources of these problems and provides a taxonomy of possible methods to bring them under control.

Lessons from the first to the latest nation to enact national health insurance.

In 1989, South Korea became the latest country to enact a national health insurance plan. In 1989-91, South Korea experienced a 22 percent increase in health care spending despite instituting the world's highest level of cost-sharing and coinsurance. Now, taking a page from the lesson book of Germany--the first country to adopt a national insurance strategy--South Korea is applying a system of global budgeting that should produce an optimal amount of cost control while preserving consumer choice.

Hospital specialization and cost efficiency: benefits of trimming product lines.

Trends in hospital specialization are studied using multiple regression analysis for the period 1983-1990. The observed 26.9 percent rise in specialization was associated with a 6.9 percent decline in unit cost per admission. Specialization is also associated with improved quality of care. Specialization has been highest in competitive West Coast markets and lowest in the rate-regulated states (New York and Massachusetts). Hospitals have less incentive to contain costs by decreasing the array of services offered in stringent rate-setting states. The term "underspecialization" is advanced to capture the inability of some hospitals to selectively prune out product lines in order to specialize. Such hospitals spread resources so thin that many good departments suffer. Unit cost per case (DRG-adjusted) is higher in the less specialized hospitals.

Hospital strategy and financial performance.

Five archetype strategies are studied involving productivity, diversification, or a hybrid approach. Manager opinions, staffing ratios, and profitability data bring the strategy effectiveness issue into perspective. Hospitals employing the productivity/defender strategy, specializing in fewer product lines, experienced less decline in profitability in recent years. Excess diversification appears to exhibit the most rapid declines in profitability.

Valuation of the benefits of risk-free blood. Willingness to pay for hemoglobin solutions.

The dream of artificial blood has existed since the 1960s. Disease-free hemoglobin solutions will be commercially available in 1991. A willingness-to-pay (WTP) survey was undertaken to assess the tangible and intangible benefits to the public from this new product. The positive results suggest that third-party payers should cover this benefit and assist the diffusion of this new technology. From the perspective of industrial marketing, results suggest that there will be little consumer price resistance for hemoglobin solutions within the suggested price range of +225-300 per unit. Management implications of this new product are discussed.

Financing the correct rate of growth of medical technology.

This article suggests ways to preserve innovation while partially restraining the impressive growth rate in new medical technology. Health care will soon consume 12 percent of GNP. There is a wide range of opinions as to whether medical technology is a major or minor source of rising health care expenditures. Given our current fiscal problems, health care providers will be in direct competition with education and other domestic programs for a limited supply of R&D funds. More funding will have to come from the private sector. The challenge for prudent buyers of health care services is to control costs without eroding the biomedical capacity of the nation.