Estimating "reasonable cost" of Medicaid patient care using a patient-mix index

A multiple regression method of defining "reasonable cost" for Medicaid reimbursement of nursing home patient care was implemented in Washington State in July 1978. A patient-mix index, the Katz ADL (Activities of Daily Living), was included in the regression equation as one of the independent variables to allow systematically for individual patient characteristics and needs in the rate-setting method. From the six measures investigated, the Katz ADL index was selected as the best predictor of patient care per patient-day cost. The way a "reasonable cost interval" of patient care per patient-day was established for each of 277 providers is described. Evidence is presented that this statistical rate-setting method contained efficiency incentives. The potential usefulness of such methods in obtaining management information at low cost should be given more consideration in efforts to reduce administrative costs of governmental health care programs, thus allocating scarce resources to patients on an equitable basis.