The effects of utilization review on hospital use and expenditures: a covariance analysis

Hospital utilization review (UR) has expanded rapidly in recent years and is now widely used by private payers as an approach to cost containment. This article reports estimates of the effects of UR on hospital utilization and medical expenditures based on a covariance estimation procedure. Claims data on 223 privately insured groups were analyzed covering a three-year period, 1984 through 1986. UR was associated with an approximate 12 percent decrease in admissions, a 14 percent decrease in hospital routine expenditures, and a 6 percent decrease in total medical expenditures. UR appears to reduce expenditures mainly by reducing admissions; hospital inpatient expenditures per admission were unaffected by the review activity. Analysis showed the effect of UR to have been greatest during the quarters immediately following implementation of the review activity. This finding underscores the need to analyze longitudinal data having sufficient time-series observations to obtain reliable estimates of long-term program impact. The analysis described here offers a computationally efficient alternative specification to the standard fixed-effects approach for analyzing pooled data, and is especially useful when the number of cross-section units is large.