Geographic classification of hospitals: alternative labor market areas

Health Care Financing Review, Winter, 1992 by Nancy De Lew

* Urbanized - Urbanized areas are defined by the U.S. Bureau of the Census based on census tracts with a population density of 1,000 persons or more per square mile. Areas in an MSA with a lower population density are considered non-urbanized (Schmitz and Merrell, 1987). * Central county - Central and outlying counties are defined by the U.S. Bureau of the Census. Central counties have 50 percent of their population in an urbanized area or contain the central city. Outlying counties are added to an MSA based on commuting, population density, and other criteria (Williams, Pettengill, and Lisk, 1990).

* Core county-counties are considered core if they have the largest population density in the MSA, weighted by population at the ZIP Code level, or if they exceed a fixed threshold of 3,500 persons per square mile. Other counties in the MSA are considered non-core (Welch and Zuckerman, 1991).

* Core city - Core or central city is defined by the U.S. Bureau of the Census. Other parts of the MSA are considered suburban ring (Cromwell, Hendricks, and Pope, 1986).

Each of the four alternative urban labor market areas divides the current MSAs into two units with the exception of core county; it only subdivides consolidated metropolitan statistical areas (CMSAs) with populations of 1 million or more. A CMSA is a combination of two or more adjacent MSAs. An example of a CMSA is the Baltimore, Maryland-Washington, DC area. (There are 207 hospitals in CMSAs with populations of 1 million that are not in an MSA with a population of 1 million - 32 of these hospitals are in core counties.)

Evaluation of criterion 1 - The labor market area definition that appeared to explain the highest percentage of labor costs was core city, followed by central county and core county (Table 4). These three alternatives would be an improvement over the current labor market area definition in terms of explaining wage variation among hospitals in MSAs with populations of 1 million or more. Urbanized does not explain any more variation than the current labor market areas. In order to compare all four alternatives across the same set of hospitals, Table 4 is limited to those hospitals with valid data on the core county alternative, which is to say those in CMSAs with populations of 1 million or more. The current MSA labor market areas explain 56 percent of the wage variation among this group of urban hospitals in large cities (compared with 68 percent for all urban hospitals).

Evaluation of criterion 2 - The ability of each alternative to differentiate between high- and low-wage hospitals, separating them into different labor market areas, was also evaluated (Table 4). This is measured by the average difference in the wage indexes of the high-and low-wage areas of each alternative (as a percent of the high-wage area). Across urban hospitals, central county, followed by urbanized, best distinguishes between the high- and low-wage labor market areas. Core county and core city are not particularly successful here.