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The Effects of Case Mix on Hospital Costs and Revenues for Medicare Patients in California

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Abstract

Hospital competition and managed care have negatively affected hospital profitability. In the current turbulent health care environment in the U.S., hospitals in California have argued that the rate of increase in hospital costs is faster than the rate of increase in hospital revenues. By employing Medicare case mix indexes (CMIs) as a primary policy variable, this study found that the coefficients for CMIs in hospital costs for Medicare patients were smaller than those in hospital revenues in the years of 1986, 1989 and 1998. However, the coefficients for CMIs in hospital costs for Medicare patients were greater than those in hospital revenues in the years of 1992 and 1995. Although there were some differences between the coefficients for CMIs in hospital costs and revenues for Medicare patients, those differences found to be statistically insignificant. In spite of claims on behalf of Californian hospitals, the rate of increase in hospital costs for Medicare patients had not been greater than that of hospital revenues for Medicare patients.

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Notes

  1. This model is basically based on Zwanziger et al. [27]. The author added payer-specific case mix index and HMO penetration rates to analyze the relationship between case mix index and hospital costs (and revenues).

  2. Most studies of hospital competition rely on one of two standard competition measures that capture the classic determinants of competition: the number and relative sizes of firms. In economic theory, producer markets for a homogeneous product sold to many informed buyers will be competitive if there are many small sellers. The presence of more firms is thus typically associated with more competition. The classic economic definition of competition also requires that all of the forms be small in the sense that none of them is large enough to dictate the price in the market. More generally, markets with more evenly balanced firms are apt to be more competitive than markets in which there are some firms that are larger and more powerful than their neighbors [41].

    The simplest type of measure counts the number of competing firms. This is an appealing, frequently easily implementable, and intuitive approach. Yet, this approach does not capture the relative sizes of firms, which can play an important role in competition. Both the number and relative size of firms are better captured in the Herfindahl–Hirschman index (HHI), perhaps the most common measure of competition. The HHI for a market is the sum of the squared market shares of all of the firms competing in the market. HHIs are the standard measure used by the Department of Justice and Federal Trade Commission in evaluating the degree of concentration in markets for antitrust policy and are frequently used in empirical work in health services research.

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Lee, KH. The Effects of Case Mix on Hospital Costs and Revenues for Medicare Patients in California. J Med Syst 31, 254–262 (2007). https://doi.org/10.1007/s10916-007-9063-2

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