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Health Services Research & Development

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HERC Health Economics Seminar

Efficiency Differences Between Critical Access Hospitals and Non-Converting Rural Hospitals


by Ryan Mutter, Ph.D.
Seminar date: 5/18/2011

Description: 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. In this analysis, the cost-inefficiency of CAH hospitals was compared with that of non-converting 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 34 states for the period 1997 - 2004. Average estimated cost inefficiency was greater in CAHs (15.9%) than in non-converting rural hospitals (10.3%). 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 (FTE 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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