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In the ongoing effort to control costs, comparisons among hospitals' efficiency levels, if valid, can help identify “best practices” across institutions and uncover situations that need corrective intervention. The authors present an extension of the “adjusted cost per equivalent discharge” approach, which incorporates case-mix-severity differences, regional labor cost differentials, and inpatient/outpatient mix, but does not take into account such factors as the differences in hospital sizes, extents of the teaching mission, or quality of care delivered.The alternative approach yields information that suggests where an institution's total operating costs might be reduced with no change in any of the hospital's outputs or operating environment, through comparison with a “peer group” of other hospitals, matched according to the subject hospital's number of beds, the quality of care the hospital delivers, the extent of medical education carried out, the level of case-mix-adjusted discharges, and outpatient activities. A difficulty with this approach (as with others) is that measurement of some of the additional facets (e.g., quality of care) is still evolving, so its main contribution at this time is to provide a construct and method capable of incorporating these important added considerations.Hospital rankings achieved by applying the current and alternative approaches to a real set of teaching hospitals operating in FY 1987 are compared. While the rankings produced by the two approaches are loosely similar, the authors show that some significant differences do appear and can be at least partially explained by the incorporation of the additional factors mentioned above.