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Hospital senior financial executives routinely review measures of facility costs to assess their organization's cost-efficiency. The measures they typically use for this activity are cost per adjusted discharge and cost per adjusted patient day. These measures have flaws that limit their usefulness for comparing cost-efficiency of different hospitals. A more effective measure is the hospital cost index (HCI), which adjusts for case-mix complexity in both inpatient and outpatient operations and can be computed from publicly available databases. The highly reliable HCI enables senior financial executives to make comparison among specific hospitals, including direct competitors.
Controlling costs is essential for healthcare providers to maintain financial viability in today's tough economic environment. To measure costefficiency, healthcare financial managers typically compare a large number of cost metrics with external benchmarks in a "drill-down" format, providing information by facility and then breaking the information down by department and procedure. Unfortunately, these facility measures often are biased and do not support reliable comparisons. Most facilitywide measures rely on an adjusted-discharge or patient-day framework that assigns weights to outpatient activity. Several factors can affect the reliability of these data. The recently introduced outpatient prospect tive payment system (PPS) with its ambulatory classifications (APCs), in conjunction with the inpatient PPS and its DRG case-weighting system, presents a unique opportunity to use a more meaningful measure of overall hospital cost-effectiveness, the hospital cost index (HC).
LIMITATIONS OF ADJUSTED-DISCHARGE MEASURES OF COST
In the past 20 years, outpatient activity has increased from less than 20 percent to close to 40 percent in most hospitals in 1999.a This dramatic increase in outpatient activity has significantly affected facilitywide cost measurement by magnifying the limitations associated with using a system that relies on adjusted discharges or adjusted patient days. The critical factor in arriving at a reliable measure of adjusted discharge or adjusted patient day is the weighting of outpatient revenue. The following formula is used to determine adjusted discharges or patient days:
To identify the specific issues that affect the comparability of the adjusted discharge, it is useful to consider the real-life example of a teaching hospital with about $380 million in gross charges in 2000, with 60 percent of total revenue from inpatient services. Exhibit 1, page 38, presents cost per adjusted discharge (CPAD)...