Policy implications of fixed-to-total-cost ratio variation across rural and urban hospitals

Hospitals with lower fixed-to-total-cost ratios may be better positioned to remain financially viable when reducing service volumes required by many value-based payment systems. We assessed whether hospitals in rural areas have higher fixed-to-total-cost ratios, which would tend to create a systematic disadvantage in such an environment.

Our observational study used a mixed-effects, repeated-measures model to analyze Medicare Hospital Cost Report Information System data for 2011-2020. We included all 4,953 nonfederal, short-term acute hospitals in the United States that are present in these years. After estimating the relationship between volume (measured in adjusted patient days) and patient-care costs in a model that controlled for a small number of hospital characteristics, we calculated fixed-to-total-cost ratios based on our model's estimates.

We found that nonmetropolitan hospitals tend to have higher average fixed-to-total-cost ratios (0.85-0.95) than metropolitan hospitals (0.73-0.78). Moreover, the degree of rurality matters; hospitals in micropolitan counties have lower ratios (0.85-0.87) than hospitals in noncore counties (0.91-0.95). While the Critical Access Hospital (CAH) designation is associated with higher average fixed-to-total-cost ratios, high fixed-to-total-cost ratios are not exclusive to CAHs.

Overall, these results suggest that hospital payment policy and payment model development should consider hospital fixed-to-total-cost ratios particularly in settings where economies of scale are unattainable, and where the hospital provides a sense of security to the community it serves.