The trade-off between hospital cost and quality of care. An exploratory empirical analysis

The debate concerning quality of care in hospitals, its "value" and affordability, is increasingly of concern to providers, consumers, and purchasers in the United States and elsewhere. We undertook an exploratory study to estimate the impact on hospital-wide costs if quality-of-care levels were varied. To do so, we obtained costs and service output data regarding 300 U.S. hospitals, representing approximately a 5% cross section of all hospitals operating in 1983; both inpatient and outpatient services were included. The quality-of-care measure used for the exploratory analysis was the ratio of actual deaths in the hospital for the year in question to the forecasted number of deaths for the hospital; the hospital mortality forecaster had earlier (and elsewhere) been built from analyses of 6 million discharge abstracts, and took into account each hospital's actual individual admissions, including key patient descriptors for each admission. Such adjusted death rates have increasingly been used as potential indicators of quality, with recent research lending support for the viability of that linkage. The authors then utilized the economic construct of allocative efficiency relying on "best practices" concepts and peer groupings, built using the "envelopment" philosophy of Data Envelopment Analysis and Pareto efficiency. These analytical techniques estimated the efficiently delivered costs required to meet prespecified levels of quality of care. The marginal additional cost per each death deferred in 1983 was estimated to be approximately $29,000 (in 1990 dollars) for the average efficient hospital. Also, over a feasible range, a 1% increase in the level of quality of care delivered was estimated to increase hospital cost by an average of 1.34%. This estimated elasticity of quality on cost also increased with the number of beds in the hospital.