How much of the variation in hospital financial performance is explained by service mix?

1. How much of the variation in hospital financial performance is explained by service mix? Presented by: Richard Lindrooth Medical University of South Carolina Co-authors: Jan Clement, Mei Zhao, Gloria Bazzoli Virginia Commonwealth University Hospital Finances and the Quality of Hospital Care Agency for Healthcare Research and Quality Grant #R01 HS13094

2. Research Objectives • To explain and quantify how the distribution of hospital financial performance is affected by: • service offerings, • payer mix or generosity, • ownership, and • operational decisions. • Assess whether this relationship is consistent over time.

3. Background • Service offerings are an important tool available to hospital administrators that can be used to influence financial performance. • In contrast, hospital administrators can only manipulate payer or payment generosity mix indirectly. Location, market conditions etc.. are not easily changed without actually physically moving a hospital or merging with a competitor.

4. Background • Devers, Brewster, and Casalino (2003) suggest a ‘new medical arms race’ may be beginning. They trace the catalyst of the shift to less selective contracting, capitated contracts, and the emergence of new competitors (specialty hospitals and outpatient centers). • We expect that between 1995-2000: • The number and share of profitable services at the hospital will explain a greater proportion of the variation later in the period. • The effect of payer mix will decline relative to service offerings throughout the period. • The effect of ownership and non-service-related operational decisions should remain constant.

5. The Distribution of Hospital Financial Outcomes • H1: As importance of service offerings increases, the distribution of financial outcomes becomes wider. If offering new and expensive services leads to greater profitability, then hospitals with access to capital to invest in these services will become more profitable. Hospitals with the easiest access to capital also tend to be the most financially stable.

6. The Distribution of Hospital Financial Outcomes • H2: As the importance of managed-care payer-mix decreases, the distribution of financial outcomes will be most affected at the top end of the distribution. • The decline of selected contracting would lead to patients being more dispersed across markets, leading to higher rates overall. • The bottom end of the distribution may be less affected, because the payer mix at these hospitals is dominated by charity care, Medicaid, and Medicare.

7. Data • Same sample as previous presentations. • The main difference is that we derive of measure of the number of the 25 most profitable (and unprofitable) services, and the hospital share of those services from the claims data. • Profitability is defined based on: The DRG Handbook: Comparative Clinical and Financial Benchmarks 2003. Evanston, IL: Solucient, 2003.

8. Profitable and Unprofitable Services • Profitable: • Coronary and Cardiac Services (DRG 104-107; 109-110; 112; 120; 123-125) • Tracheostomy (DRG 483), and others • Unprofitable: • Cellulitis (DRG 477-478), GI Hemorage/Obstruction (DRG 174-175; DRG 181) , Psychiatric and Substance Abuse (DRG 429-430; 434-435), Hip & femur procedures (DRG 210-211; DRG 236) • Based on Medicare Reimbursement. Many private insurers pay based on a percent of Medicare. Thus, what is important is the relative price, not the absolute price.

12. Variables • Services • Number of 25 most profitable services • Share of 25 most profitable services • Number of 25 most unprofitable services • Share of 25 most unprofitable services • Payer • Share of Medicare, Medicaid, Charity, Other, HMO penetration, HHI, PC Income, Market beds per capita, Market occupancy rate • Ownership • For-profit, secular non-profit, religious non-profit, teach. • Operations • Staff per bed, Nurse per bed, RN pct, Adj Admissions, Total Beds.

16. Interquantile Regressions • 25th Quantile versus 50th, 75th, and 90th • Factors that lead to more dispersion: • Charity Care, HHI • Share of Profitable Services (75th , 90th) • Per capita income • Factors that lead to less dispersion: • Number of unprofitable and profitable services • Medicare (75th and 90th) • Beds per capita • Results for cash flow similar, except per capita income becomes less significant.

17. Interquantile Regressions • 50th Quantile versus 75th, and 90th • Factors that lead to more dispersion: • Share of Profitable Services (75th , 90th) • Factors that lead to less dispersion: • Number of profitable services • Medicare (90th) • Beds per capita • Results for cash flow similar, except Medicare becomes significant for the 75th percentile.

18. Conclusions • Increases in charity care and Medicaid hurt the poor performing hospitals more than others due decreasing returns to treating these patients. • The difference between poor performing and moderate performing is also due to HHI. Moderately performing hospitals are more likely to be able to take advantage of higher HHIs in terms of higher reimbursement. • Increases in the share of profitable services helps all hospitals. However: increases in the share of profitable services pushes the well/excellent performing hospitals up further. This points to increasing returns to these services.

19. Significance • The most profitable hospitals have a higher share of profitable services. Increasing those shares will lead to even more increasing profits unless they face new competition. • We would expect more entry and increasing competition in services with higher expected profitability. Hospitals that specialize in the services will be extremely profitable. Is this good? Given volume and financial performance considerations? Can Medicare retain some of those rents? • Increases in uninsurance (charity care) hurt poorly performing hospitals the hardest. • Do the trends point to a two-tiered health system?