Why do hospital costs vary so much?

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Hospital costs vary widely. The reasons are often in dispute.

The value of analysis, though, is clear.

“[N]early 30 percent of Medicare‟s costs could be saved without negatively affecting health outcomes if spending in high- and medium-cost areas could be reduced to the level in low-cost areas—and those estimates could probably be extrapolated to the health care system as a whole,” former Congressional Budget Office Director Peter Orszag said in a 2008 presentation to the National Academy of Social Insurance.

He’s quoted in a new paper, “Beyond the Dartmouth Atlas of Health Care: Exploring Variations in Inpatient Hospital Costs in New York State,” conducted by the Maxwell School of Syracuse University for the New York State Health Foundation and released recently.

Here’s a chart showing the paper’s cost for discharge by peer groups in the study for acute myocardial infarctions:

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Here’s another chart, this one for “routine” costs for the same patients, routine costs including room, dietary and nursing services, minor medical and surgical supplies and equipment costs that aren’t charged separately:

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The differences are striking. To explain, the people conducting the study did interviews to explain the reasons behind the differences. They did multivariate regressions, analyzed culture and resource utilization, and tried to figure out the causes.

“We were not able to categorize hospitals into any sort of typology that was predictive of a particular cost or quality pattern,” they concluded. “Overall, our findings are consistent with earlier research that showed that the resources used in the care of chronically ill patients varies widely and that the reasons behind this variation is not easily or crisply explained (Baker et al, 2008). In fact … our research team came to the conclusion that the unique geographic, marketplace, workforce, culture and general characteristics of each hospital limit finding a common thread to explain either quality of care or resource utilization performance.”

In short, they couldn’t figure it out. But they did note that there was a degree of openness to information and to change that characterized the attitudes of the top performers:

“We agree that hospital culture plays a critical role and we anecdotally noted different degrees of openness to unfavorable data from the various hospital leadership teams, ranging from viewing the data as a springboard for improvement, to highly critically dismissal of the data. These cultural differences were difficult to measure in our study, but did seem to be a factor in hospital performance.”