Medicare inpatient physician charges: an ecometric analysis - Hospital Payment: Beyond the Prospective Payment System

Health Care Financing Review, Winter, 1993 by Mark E. Miller, W. Pete Welch

Case-Mix Adjustment

The impact of case-mix adjusting is shown in Table 1, which displays adjusted and unadjusted physician charges by hospital type.(7) Case-mix adjustment has clear effects on the distribution by urban or rural location and bed size. Rural hospitals are 34 percent below the mean for unadjusted charges but only 18 percent below the mean once case-mix adjustment has been made. Conversely, case-mix adjustment lowers the charges of urban hospitals (relative to the national mean) from 10 percent to 5 percent above the mean. Before case-mix adjustment, small hospitals (100 beds or fewer) have mean charges lower than the national mean, and larger hospitals (300 beds or more) have charges above the national mean. After case-mix adjustment, these variances remain, but case-mix adjustment moves them closer to the mean.

[TABULAR DATA 1 OMITTED]

The effect of case-mix adjustment on the distribution of physician charges by teaching status is dramatic, but counter-intuitive. Major teaching hospitals have unadjusted mean charges 17 percent above the national mean, but their case mix is 24 percent above the national mean.(8) As a result, their case-mix-adjusted charges are 6 percent below the mean. In fact, major teaching hospitals have lower mean charges than non-teaching hospitals when case mix is taken into account. Minor teaching hospitals have the highest case-mix-adjusted charges of all. This is in contrast to analyses of inpatient facility costs, where minor teaching hospitals have higher costs than non-teaching ones, and major teaching hospitals have higher costs than minor ones. (GME costs are an important component of teaching hospital physician costs, and their impact on teaching hospital charges will be discussed.

We draw two conclusions regarding case-mix adjustment. First, case-mix adjustment is significant. Much of the deviation from the national mean is accounted for by case mix. Second, the overall effect of adjustment is to move hospitals toward the national mean, although they usually maintain their respective positions. In particular, case-mix adjustment increases (relative to the national mean) charges for small, rural, non-teaching, and non-disproportionate share hospitals and decreases charges for large, urban, minor teaching, and disproportionate share hospitals (DSHs). A notable exception is the case of major teaching hospitals, where case-mix adjustment decreases charges relative to the national mean.

Effect of Including GME Costs

Interns and residents provide physician services in teaching hospitals, and so conceptually these GME costs can be added to physician charges in teaching hospitals. When only Part B physician charges are considered, minor teaching hospitals have above average (case-mix-adjusted) physician charges (1.06), but major teaching hospitals have below average charges (0.94). This is contrary to expectations based on research involving inpatient facility costs, which increase with the size of the hospital's teaching activity (Sloan, Feldman, and Steinwald, 1983). Teaching hospitals are thought to engage in more diagnostic testing and intensive technologies as part of the teaching function (Martz and Ptakowski, 1978). Severity of illness, which is not captured by differences in case mix, is also thought to contribute to higher teaching hospital costs (Horn and Sharkey, 1983). Higher teaching hospital costs are recognized by Medicare PPS payments.