Baserate benchmarking of hospitals: A case for robust cost-benefit analysis

At present Germany experiences a shake-up of the hospital industry, following the introduction of a DRG-based hospital budgeting system. Hospital owners re-evaluate their assets and adapt their strategies to the new regulatory environment. Benchmarking studies play a vital role in assessing own hospitals as well as potential cooperation partners or acquisition targets. Key indicators in such studies are hospital baserates, which reflect case-mix adjusted costs per case in the respective hospitals. The case-mix adjustment is based on published DRG weights which determine the pay-per-case. Setting these weights is a difficult and lengthy political process and weights are likely to be volatile during the early phase of the new budgeting system, when the majority of strategic activity occurs. The derived baserates are therefore only snapshots and provide limited information about future profitability of hospitals. To rectify this shortcoming, we suggest a robust benchmarking methodology which recognises weight volatility explicitly. We apply the methodology to two groups of hospitals in Germany, a homogeneous nation-wide group of 18 maximal care units and a more heterogeneous group of all hospitals in a federal state. Managerial and policy implications are discussed. The methodology is presented in the general framework of a ratio-based cost-benefit analysis, which makes it applicable to a wide range of public sector benchmarking studies. [email protected], University of Cologne and University Hospital Hamburg (Germany) [email protected], Judge Institute of Management, University of Cambridge (UK)