Trends in total hospital financial performance under the prospective payment system

Health Care Financing Review, Spring, 1992 by Charles R. Fisher

financial data as "fiscal year" data in this article is not strictly accurate.

The relationship between list and transaction prices follows from definitions of these two prices: Let: [P.sub.L] = List price [P.sub.PT] = Patient care output transaction price G = Gross patient revenues N = Net patient revenues O = Number of patient care outputs

Then: [P.sub.L] = G/O [P.sub.PT] = N/O [P.sub.L]/[P.sub.PT] = (G/O)/(N/O) = G/N [P.sub.PT] = [P.sub.L]/(G/N)

For rates of change between period "0" and period "1,"

[P.sub.PT1]/[P.sub.PT0] = ([P.sub.L1]/[P.sub.L0])/(([G.sub.1]/[N.sub.1])/([G.sub.0]/[N.sub.0]))

The change in list prices, [P.sub.L1]/[P.sub.L0], is proxied by the CPI hospital component. The change in the ratio of gross patient revenues to net patient revenues, ([G.sub.1]/[N.sub.1])/([G.sub.0]/[N.sub.0]), is available from Medicare Cost Reports and AHA annual Hospital Statistics. The change in patient care output transaction prices is thus the quotient of the change in the CPI hospital component divided by the change in the ratio of gross patient revenues to net patient revenues.

Derivations of transaction price changes in Tables 2 and 3 are based on three assumptions about their determinants:

* That hospitals do not engage in discriminatory pricing for various products and services (i.e., they do not alter the relationship between list prices for individual outputs to maximize revenues).

* That the CPI Hospital Index captures the list price effects of all hospital outputs.

* That the consumer expenditure weights used by the Bureau of Labor Statistics for individual categories of hospital prices do not result in material differences in total CPI for hospital changes when compared with total CPI Hospital Index changes based on industry-derived expenditures weights.

To the extent that these assumptions hold true, transaction price trends shown in this article reflect actual trends.

Alternative measures for trends in hospital wages and/or benefits shown in Table 7 are sometimes used in various input price market baskets:

* Bureau of Labor Statistics wage series including Hospital Average Hourly Earnings for private hospital non-supervisory workers and Employment Cost Index (ECI) series for private and State and local hospital workers.

* American Hospital Association panel survey wage and benefit data.

Trends in these alternative measures generally parallel the measure shown in Table 7 in direction but not always in magnitude.

Balance sheet data in Table 17 were estimated from subsets of Medicare Cost Reports, which reasonably represented the universe of 5,161 hospitals whose income and expense data are shown in Table 15, because some hospitals did not report balance sheet data.

Technical note

Medicare Cost Report data trends

In order to portray characteristics of hospitals under PPS that are not available from the AHA annual surveys, I prepared a data file of 5,161 hospitals that were continuously under PPS for all cost report years 1985 through 1989. Revenue, expense, and balance sheet data in Table 15 were obtained from this file. This set of hospitals differs from the AHA set of hospitals portrayed in Tables 1 through 14 in two major respects: