Health Affairs, 22, no. 6 (2003): 126-129 doi: 10.1377/hlthaff.22.6.126 © 2003 by Project HOPE	New Online   Obama's Success & Next Steps   3 Health Policy Options for President Obama   A Hybrid Proposal   Bipartisan Compromise

This Article Abstract Reprint (PDF) Submit a response to this article Alert me when this article is cited Alert me when Comments are posted Alert me if a correction is posted Services E-mail this article to a friend Similar articles in this journal Similar articles in ISI Web of Science Similar articles in PubMed Alert me to new issues of the journal Add to My Personal Archive Download to Citation Manager Reprints & Permissions Citing Articles Citing Articles via ISI Web of Science (1) Citing Articles via Google Scholar Google Scholar Articles by Newhouse, J. P. Search for Related Content PubMed PubMed Citation Articles by Newhouse, J. P. Related Collections Hospitals Research And Technology Safety-Net Systems Health Spending

Teaching Hospitals

PERSPECTIVE

Accounting For Teaching Hospitals’ Higher Costs And What To Do About Them

Abstract

 
Academic health centers (AHCs) have higher costs per case and also lower margins than either other teaching hospitals or community hospitals. The differences in margins stem mostly from differences in the intensity with which similar patients are treated, as well as hospitals’ ability to generate revenue to cover the costs of that greater intensity, rather than graduate medical education per se. How much patient care capacity should be supported in AHCs and who should be treated with the greater intensity they offer are open questions. If there is to be a public trust fund to subsidize AHCs, it should be financed from general revenues.

The debate over teaching hospitals takes place in the context of much lower total margins at major teaching hospitals relative to both other teaching and community hospitals—1.5 percent versus 4.2 and 4.1 percent, respectively, in 2000.² If margins were similar, I suspect that this debate would be more quiescent. The difference in margins would be even larger but for special Medicare payments. Two types of arguments have swirled around the Medicare payments for many years. On the one hand, teaching hospitals, wishing to narrow the difference in margins, have advocated similar payments from private payers, or an all-payer fund for medical education. On the other hand, Medicare payments have been under attack as too high, and in fact Congress markedly reduced them in the Balanced Budget Act (BBA) of 1997.

Given this context, I frame the issue somewhat differently than Koenig and colleagues do by posing the following questions: How do the products at academic health centers (AHCs) differ from those of other teaching hospitals and nonteaching hospitals? The differences between the products’ cost and the price they command in the marketplace determine the differences in margins. Implicit in the debate over whether the margin differences should be narrowed is a further issue of how many of the products should be produced and who should receive them. Similar to Koenig and colleagues, I define a teaching hospital’s products or lines of business as research, education, and patient care.³

The Three Product Lines

Top The Three Product Lines Narrowing The Search A Public Trust Fund? Editor's Notes NOTES

 
Research. Because Koenig and colleagues find that research costs are modest and because research generates some revenue, it seems unlikely that research activities could be a major contributor to the difference in margins.⁴ Nonetheless, that research activity suffers with greater penetration of managed care suggests that patient care revenues may cross-subsidize research activities.⁵

"If there is to be a public trust fund to subsidize teaching hospitals, it should be financed through general revenues and not Medicare."

Education. I have argued elsewhere that teaching on balance pays for itself and hence cannot explain the differences in margins.⁶ The theoretical argument, which comes from labor economics, is based on an employer’s unwillingness to pay for training that can be used anywhere.⁷ As a result, the level of residents’ salaries nets out the cost of training from the value of the services they produce. That there are training costs is why residents, like any apprentice, earn less than senior physicians. That residents produce valuable services is why they earn a salary, in contrast with undergraduate medical students, who produce little of value to a hospital and who pay tuition. Empirical evidence supports this theory: The approximately 30 percent increase in residents after the enactment of the Medicare indirect and direct medical education (DME) payments did not change hospital costs much.⁸ That other teaching and nonteaching hospitals have similar margins is also consistent with teaching’s not causing differences in margins.

Patient care. If the principal source of the difference in margins is neither research nor education, it must be patient care. Moreover, the differences of concern are those left after wage and measured case-mix differences are controlled for, because Medicare pays for those differences, and payers that pay per diem also pay insofar as rates are higher in high-wage areas and more severely ill patients stay longer.

Narrowing The Search

Top The Three Product Lines Narrowing The Search A Public Trust Fund? Editor's Notes NOTES

 
This narrows the search for the causes of AHCs’ lower margins to three: differences in AHCs’ abilities to generate revenues; unmeasured case-mix differences; or the greater intensity with which AHCs treat similar patients.

Revenue generation. Regarding revenue generation, AHCs have both an advantage and a disadvantage. For patients who require very advanced care, some AHCs may have no local competition, whereas urban nonteaching hospitals will generally have competition for all of their patient care lines of business. Indeed, any cross-subsidization of research from patient care revenues by AHCs suggests market power. On the other hand, AHCs as a group likely face greater demands for uncompensated care; the costs of such care as a percentage of total costs were 0.7–1.0 percentage points greater at major teaching hospitals in 2001.⁹ On balance, considering AHCs as a group, these two factors could roughly cancel each other out.

Case-mix differences. Unmeasured case-mix differences appear to account for around one percentage point of the difference in margins among Medicare patients and an unknown, but probably much smaller, amount among private patients because of the more disaggregated per diem payment schemes that private payers tend to use.¹⁰ Overall, unmeasured differences in case-mix probably account for perhaps half a percentage point or less of the margin difference.

Greater intensity of care. The remaining difference, probably the major share, must come from AHCs’ treating the same type of patient more intensively and not fully recovering the additional cost in revenue. Indeed, Koenig and colleagues’ measures of standby capacity pick up aspects of the more intense treatment.

How much is the more intensive treatment worth, and who should receive it? Traditional Medicare has been a passive payer, implicitly assuming that the extra costs it paid at teaching hospitals were justified in all admissions. Managed care has been more active, threatening not to use certain hospitals if rates were not satisfactory and potentially redirecting some patients away from teaching hospitals, for example, most recently by tiered copayments in hospital networks. These efforts suggest that there might now be more capacity in teaching hospitals than the market is willing to pay for. In other words, whether we want all of the teaching hospital capacity and resulting intensity of treatment that we now have is an open issue.

The proper scale and allocation of teaching hospital services exemplifies a generic question posed by much of modern medical care. What are the standards for using treatments of varying intensity in different types of patients, and is cost relevant? These issues are analytically similar to questions about what to do about the large variation in service use across geographic areas, as well as the poor targeting implied by the over- and underuse of a variety of services in both high- and low-use areas.¹¹

A Public Trust Fund?

Top The Three Product Lines Narrowing The Search A Public Trust Fund? Editor's Notes NOTES

 
I close by returning to the two issues of an all-payer fund and the level of Medicare payments. Private payers typically pay more for patient care at teaching hospitals than at community hospitals, just as Medicare does. Thus, there is a de facto all-payer fund now. Those advocating additional payments using an all-payer fund financed through premium surcharges would in effect levy a regressive head tax to support the products of teaching hospitals.

Medicare payments are intended to cover the greater intensity of patient care at teaching hospitals. But around half of the Medicare IME payments are above the level needed to compensate for the higher Medicare patient care costs, as Koenig and colleagues note. If there is to be a public trust fund to subsidize teaching hospitals, a possibility that Koenig and colleagues raise in their discussion, it should be financed through general revenues and not the Medicare Trust Fund.

Editor's Notes

Top The Three Product Lines Narrowing The Search A Public Trust Fund? Editor's Notes NOTES

 
The author thanks Murray Ross and Gail Wilensky for comments on an earlier draft.

Joe Newhouse is the John D. MacArthur Professor of Health Policy and Management at Harvard University.

NOTES

Top The Three Product Lines Narrowing The Search A Public Trust Fund? Editor's Notes NOTES

 

1. I derive this by taking the difference between the values for cost per case at AHC hospitals and community hospitals in Koenig’s Exhibit 3, Model 2 ($3,310), and apportioning it between wages and case-mix ($1,229) and IME and other mission-related costs ($2,100) (base costs are essentially equal). Exhibit 2 shows that the IME and Other categories within teaching hospitals are approximately equally split between IME and standby costs. Although standby costs are somewhat larger, community hospitals appear to have some standby costs as well (the $260 value in Exhibit 3). Research costs appear to be under 10 percent of the difference. That base costs are similar suggests that the institutions are equally efficiently managed, which accords with having managers at both types of institutions face similar incentives to manage efficiently. I thus agree with Koenig and colleagues’ implicit conclusion that differences in costs are not attributable to differences in managerial inefficiency or effort.
2. Medicare Payment Advisory Commission, Report to the Congress: Medicare Payment Policy (Washington: MedPAC, March 2003), 279. Although "major teaching hospitals" are roughly the same as Koenig and colleagues’ "academic health centers (AHCs)," these margin data are not strictly comparable to Koenig and colleagues’ data, for two reasons: (1) The margin data include all parts of the hospital, such as the outpatient department and the skilled nursing facility, whereas Koenig and colleagues’ data include only inpatient operations; and (2) the margin data include all hospitals, whereas Koenig and colleagues’ comparison group is appropriately urban hospitals with more than 100 beds. Rural hospitals have higher margins, probably because they face less competition. Moreover, both the margin data and Koenig and colleagues’ data exclude physicians who are not employees of the hospital, but there may be subsidies of various types in both directions that a full accounting would incorporate. Comparing only private hospitals in each of the three categories somewhat narrows the gap in margins, but a substantial gap remains.
3. There are a number of econometric issues with Koenig and colleagues’ methods that I do not take up here, but see J.A.Rogowski and J.P. Newhouse, "Estimating the Indirect Costs of Teaching," Journal of Health Economics 11, no. 2 (1992): 153–171.[CrossRef][ISI][Medline]
4. Koenig and colleagues find that research accounts for 3.6 percent of AHCs’ cost (Exhibit 4), or $308. Any true subsidy to research is less than this, and there may be no subsidy at all, because AHCs receive monies for the care of patients in clinical trials, as well as research grants.
5. J.S.Weissman et al., "Market Forces and Unsponsored Research in Academic Health Centers," Journal of the American Medical Association 281, no. 12 (1999): 1093–1098.[Abstract/Free Full Text]
6. J.P.Newhouse and G.R. Wilensky, "Paying for Graduate Medical Education: The Debate Goes On," Health Affairs (Mar/Apr 2001): 136–147.
7. G.S.Becker, Human Capital: A Theoretical and Empirical Analysis with Special Reference to Education, 3d ed. (Chicago: University of Chicago Press, 1993).
8. As the number of residents grew, the coefficient on the number of residents in the equation determining the IME adjustment fell, as Koenig and colleagues note. The fall was sufficiently large that the product of the number of residents and the estimated amount each added to per case cost was roughly constant. (This, however, does not consider DME cost.) If residents are not causally related to cost, the IME measure in Koenig and colleagues’ cost decomposition should not be identified with teaching. Furthermore, DME costs should not be segregated from other costs in the regression analysis.
9. Such costs were 5.2 percent at major private teaching hospitals, 4.2 percent at other private teaching hospitals, and 4.5 percent at private nonteaching hospitals. MedPAC, A Data Book: Healthcare Spending and the Medicare Program (Washington: MedPAC, 2003), 93. Differences among the three corresponding types of public hospitals are much greater. Because the amount a private hospital spends on uncompensated care is under its control, these differences among types of hospitals do not prove that demands for uncompensated care are greater at teaching hospitals, but they are consistent with that hypothesis.
10. The 1 percent figure comes from expanding the number of categories into which Medicare in-patients are grouped from the current 500 diagnosis-related groups (DRGs) to 1,420. MedPAC, Report to the Congress: Selected Medicare Issues (Washington: MedPAC, June 2000), 77. The coefficient on the resident-to-bed variable is little changed by this expansion.
11. Center for the Evaluative Clinical Sciences, Dartmouth Medical School, The Quality of Medical Care in the United States: A Report on the Medicare Program, The Dartmouth Atlas of Health Care 1999 (Chicago: American Hospital Association Press, 1999); M.R.Chassin et al., "Does Inappropriate Use Explain Geographic Variation in the Use of Health Care Services? A Study of Three Procedures," Journal of the American Medical Association 258, no. 18 (1987): 2533–2537[Abstract]; and M.R.Chassin and R.W. Galvin, "The Urgent Need to Improve Health Care Quality," Journal of the American Medical Association 280, no. 11 (1998): 1000–1005.[Abstract/Free Full Text]

                      What's this?