Case mix adjustment in hospital cost analysis: information theory revisited

Acute care hospitals have long been viewed as multi-product 'firms', a characteristic which has necessitated special adjustments for cost analyses of this sector. Output mix adjustment has generally had an ad hoc flavour, with service/facility proxies and patient mix variables often being used interchangeably. Where specific patient mix adjustment has been applied, methodologies have varied widely. In this paper a framework for viewing output standardization in cost analyses is offered. It is suggested that adjustment is necessary in two dimensions--activity mix and, within patient care activities, patient mix. Patient mix standardization may be accomplished through left-side (dependent variable) or right-side (independent variables) adjustment, and right-side efforts may, in turn, be classified according to diagnostic grouping/weighing combinations. A number of right-side patient mix standardization methods are reviewed briefly and one--using information theory to compute diagnostic complexities--is tested in a time series/cross section analysis of 87 British Columbia acute care hospitals over an eight-year period. Case mix complexity is found to vary within individual hospitals over time, and is confirmed as an important determinant of unit cost variation. The information theory approach is shown to generate intertemporally stable case complexity measures. Teaching activities are found to exert a strong indirect influence on inpatient unit costs.