An Analysis of Hospital Costs by Cost Center, 1971 Through 1978

Hospital cost analyses generally have not used costs broken down by hospital department or function due to the unavailability of appropriate data. The Medicare Cost Reports display direct cost by cost center, and the Health Care Financing Administration (HCFA) funded a project to abstract, edit, and categorize these data from a sample of 457 hospitals into meaningful groups. The author used the resulting data base to analyze trends in hospital costs, with cross tabulations by a hospital's teaching status, type of control, and bed size class, from 1971 through 1978. The author also used this data base to preliminarily assess whether introduction of the Medicare Section 223 reimbursement limits altered cost center growth trends. The study found that the largest cost increases occurred among Ancillary Services. It also found slightly higher than average increases in Inpatient Services (concentrated in Special Care Units), and General Services increased at a below average rate. Outpatient Service costs escalated rapidly in absolute terms but rose much more slowly in per unit terms. The fastest growing cost quantity in the study was Other Ancillary Services, a miscellaneous group encompassing many of the new advanced technology services, which increased at a rate of 24 percent per year between 1973 and 1978. The study found costs per unit of output to be positively associated and bed size across all cost center categories, including General Services, where some evidence of economics of scale might have been expected. The study found no evidence that the Section 223 limits affected cost growth longitudinally, but an understanding of the impact of these limits will require considerably more study.