The contribution of case-mix severity to the hospital cost-output relation

Analyses of the cost-output relation of hospital care often omit diagnostic case mix from the analytic model. In this study, we examine the bias that arises from the use of either single-dimensional output volume or structural hospital capacity, but not case-mix severity, to analyze hospital costs and outputs. We found that hospitals with higher admission rates tend to admit less severe case mixes, other things equal, which implies that specialized facilities are relatively underutilized. Our finding provides a rationale for regionalization and sharing of costly specialized services and for reimbursement controls on the cost of capital. We conclude that public policy should focus on optimizing the mix of treatment services rather than on hospital size per se.