Value Chain, Quality-, and Cost Management in High Cost Areas in Response to Changing Economic Incentives - Evidence From a German Hospital

Background: In most developed countries, the past 30 years have witnessed a tremendous increase in the economic pressure put on hospitals by governments to increase their efficiency. While there is little doubt that high-powered reimbursement systems like capped budgets or prospective payment provide hospitals with strong incentives to reduce their costs, the resulting impact on quality remains a hotly debated issue. A main problem is that hospital response strategies to increased economic pressure are often both highly complex and displaying numerous interdependencies. Objective: This study wants to gain some insight into this complexity by empirically exploring potential relations and interdependencies within the hospital value chain with a particular focus on operating rooms as high cost areas. Our main research question concerns the relation between short-term quality outcomes measured by the probability for a complication in the post anesthesia care unit (PACU) and hospital responses to economic incentives. For the latter, we focus on risk selection activities and specialization strategies that may result in individual and/or organizational learning effects in the OR and/or economies of scale. Methodology: Using data from a small German hospital for the 1994-2002 period, we are able to identify a point in time where economic pressure on this hospital increased considerably. We then estimate Logit models that analyze the impact of this increase in economic pressure on hospital responses in terms of efficiency and (short-term) quality.Results: We found that for our hospital, for which extant literature already identified a specialization strategy on procedures it performed well (endoprothetic surgery) as well as a risk selection behavior by avoiding high-risk patients, these economic response strategies and short-term quality proved strategic complements. Specialization as well as a reduction in high-risk patients increased quality by reducing the probability for complications in the PACU. Interestingly, this held for both endoprothetic as well as other surgeries suggesting the existence of spillover or organizational learning effects and can hence confirm an increase in overall costs by reducing follow-up costs