Health Care Costs and Financing

Previous hospital performance, internal operations, and market competition are key in improving hospital performance

Hospitals employ various strategies to enhance their performance and control costs. To better understand what drives organizational improvements, H. Joanna Jiang, Ph.D., and Bernard Friedman, Ph.D., of the Agency for Healthcare Research and Quality, and a University of Minnesota colleague, James W. Begun, Ph.D., analyzed data on 934 hospitals in 10 States from the Healthcare Cost and Utilization Project State Inpatient Databases for 1997 and 2001. High-performance hospitals were defined as high-quality (low mortality rates for six common medical conditions and four surgical procedures) and low cost.

The effectiveness of strategies to improve performance differed by a hospital's baseline performance. Among hospitals in the high-cost category in 1997, cost-containment strategies (for example, reduced nurse staffing) were helpful to hospitals with low mortality rates.

Yet, revenue-enhancing strategies (for example, shifting to outpatient services) were helpful to those hospitals with high mortality rates. Among hospitals in the low-cost/high-mortality category in 1997, increasing nurse staffing levels with no change in skill mix was found effective in improving hospital performance.

The ability to reduce nurse staffing without compromising quality of care or increase nurse staffing without incurring higher costs characterized those hospitals that successfully moved into the high-performing group over time. Furthermore, achieving high-quality/low-cost performance was associated with improved profit margins.

Changes in market forces (for example, competition from other hospitals and managed care penetration) only affected movement of low-mortality/high-cost hospitals into the high-performing category over time. The researchers suggest that health policymakers consider the concurrent effects of market forces in evaluating pay-for-performance programs. In areas where market forces have been strong and hospitals already have moved in the direction of lower costs and higher quality, the response to pay-for-performance may be relatively weak. Conversely, the effects may be more striking where market forces have been weak.

Finally, hospitals that were persistently high-performing in both 1997 and 2001 were more likely to be investor-owned and system-affiliated. They had a higher share of Medicare patients, but lower nurse staffing levels, and were located in markets with more HMOs.

See "Sustaining and improving hospital performance: The effects of organizational and market factors," by Drs. Jiang, Friedman, and Begun, in the July-September 2006 Health Care Management Review 31(3), pp. 188-196. Reprints (AHRQ Publication No. 06-R067) are available from the AHRQ Publications Clearinghouse.

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