Assessing Hospital Efficiency: Considerations for States Seeking to Reduce Health Care Costs

Executive Summary

High and rising hospital spending is a primary contributor to unsustainable commercial market spending growth. As more state policymakers and employer purchasers recognize these trends, they are looking for ways to assess hospital efficiency, that effectively a hospital is using available resources to deliver patient care. These assessments can help determine when hospitals can reduce expenses and/or when payers can reduce negotiated hospital prices, without compromising quality or patient safety. Policies and contracts informed by these assessments can reduce excess commercial market hospital spending, resulting in more affordable, high-quality care for both employers and consumers.

This brief provides an overview of existing state, federal, and private sector hospital efficiency measures; the advantages and limitations of those measures; potential modifications to existing measures; and options for how states can employ new or existing measures to better understand current hospital efficiency levels and incentivize improved efficiency. It focuses on measures that primarily use publicly available or state-accessible data and organizes them into three main domains: (1) Delivery of Wasteful Hospital Services; (2) Hospital Revenue per Unit; and (3) Hospital Expenses.

We conclude that although no existing hospital efficiency measure or measurement domain is comprehensive, hospital efficiency measurement is still a worthwhile pursuit for states and other entities concerned with commercial market affordability. The Hospital Revenue per Unit domain is particularly promising; this domain includes multiple viable measures from which states can select or choose to combine.

To support states interested in implementing or developing hospital efficiency measures, we propose principles and parameters for hospital efficiency measurement:

• Incorporating quality metrics in addition to financial metrics
• Measuring performance over time
• Grouping hospitals by type (e.g., tertiary care centers, critical access hospitals) when comparing relative efficiency
• Balancing comprehensiveness with complexity if developing composite measures
• Focusing measurement on efficiency relative to peer hospitals rather than attempting to develop an absolute definition of efficiency

We also offer policy options for states to employ selected efficiency measures based on their health care environment and policy goals:

• Public reporting of individual hospital performance on efficiency measures, in conjunction with standardized public reporting of hospital expenses
• Requiring a hospital to enter into an “efficiency improvement plan” if the hospital performs poorly on the selected efficiency measure(s)
• Developing new hospital payment models that incentivize efficient operations
• Requiring “efficiency adjustments” to commercial insurers’ hospital contracts based on performance on selected efficiency measures
• Encouraging commercial insurers to adopt plan designs that promote more efficient spending
• Supporting individual or cross-hospital activities to streamline internal hospital operations

The Appendix describes how each example measure or set of metrics is calculated and applied, and identifies advantages and limitations of each measure.