Policy implications of fixed‐to‐total‐cost ratio variation across rural and urban hospitals

Abstract

AbstractPurposeHospitals with lower fixed‐to‐total‐cost ratios may be better positioned to remain financially viable when reducing service volumes required by many value‐based payment systems. We assessed whether hospitals in rural areas have higher fixed‐to‐total‐cost ratios, which would tend to create a systematic disadvantage in such an environment.MethodsOur observational study used a mixed‐effects, repeated‐measures model to analyze Medicare Hospital Cost Report Information System data for 2011‐2020. We included all 4,953 nonfederal, short‐term acute hospitals in the United States that are present in these years. After estimating the relationship between volume (measured in adjusted patient days) and patient‐care costs in a model that controlled for a small number of hospital characteristics, we calculated fixed‐to‐total‐cost ratios based on our model's estimates.FindingsWe found that nonmetropolitan hospitals tend to have higher average fixed‐to‐total‐cost ratios (0.85‐0.95) than metropolitan hospitals (0.73‐0.78). Moreover, the degree of rurality matters; hospitals in micropolitan counties have lower ratios (0.85‐0.87) than hospitals in noncore counties (0.91‐0.95). While the Critical Access Hospital (CAH) designation is associated with higher average fixed‐to‐total‐cost ratios, high fixed‐to‐total‐cost ratios are not exclusive to CAHs.ConclusionsOverall, these results suggest that hospital payment policy and payment model development should consider hospital fixed‐to‐total‐cost ratios particularly in settings where economies of scale are unattainable, and where the hospital provides a sense of security to the community it serves.