Cost-benefit analyses of California family practice residencies

Journal of Family Practice, May, 1989 by Paul G. Barnett, John E. Midtling, William H. Burnett, Franklyn D. Dornfest, J. Edward Hughell, Nornam B. Kahn, Fran S. Larsen

JOINT-PRODUCTS COST ANALYSIS IN ONE CALIFORNIA PROGRAM

A joint-products cost analysis was applied to one of the study hospitals, the Natividad Medical Center, in Salinas, California, a 200-bed public hospital with 18 family practice residents and no other graduate medical education program. The pure costs of education were calculated by estimating the effect of elimination of the residency, while keeping the amount of patient care constant.

Table 3 shows that the elimination of the residency program would decrease the hospital's net return by $143,534. This decrease is less than 1% of the hospital's budget. The pure cost of family practice training at this hospital was negative, for although expenses could be reduced by substituting fully trained physicians for residents, this reduction would be more than offset by the loss of income from Medicare and residency grants.

If these special sources of income did not exist, the hospital would increase its net return by $428,083 by eliminating the residency. Without the Medicare reimbursement and grants, the pure cost of education would be substantial.

This analysis is highly dependent on assumptions that must be made. The most difficult of these assumptions is in estimating the relative productivity of residents and the staff physicians who might replace them. The Graduate Medical Education National Advisory Committee estimated that resident physicians provide 35% of the care given by fully trained physicians. [19] While it may seem unreasonable that three residents, each working 70 to 90 hours a week, are only as productive as a single fully trained physician working 50 hours a week, this ratio was accepted because of the concomitant increase in the productivity of the physicians who now spend much of their time in teaching and administering the residency program.

It was also assumed that after elimination of the residency, the faculty physicians could be retained at the same rate of pay. This assumption may not be true because it is possible the presence of the educational program has allowed the hospital to recruit and retain higher caliber physicians at lower pay.

The literature is replete with case-mix controlled estimates of the higher costs of teaching hospitals. [10,11] With such studies in mind, it was estimated that the substitution of fully trained physicians would reduce laboratory orders by 10% and the use of radiology and pharmacy by 5%. Reduced utilization of ancillary services was assumed to cause a proportionate reduction in the variable costs, such as supplies, materials, and temporary and contract services, but no reduction in the fixed costs of capital, equipment, and full-time staff. Projected savings were $85,180.

The cut in ancillary orders would cause a $24,246 decrease in hospital revenue. This amount is the reduction in reimbursement for the care of the 18% of the hospital's patients who were sponsored by a fee-for-service payer.

Revenues would increase by $136,000 because replacement physicians would bill payers that do not pay for inpatient services provided by residents. This figure is based on an estimate that revenues for inpatient physician services would increase by 20%.