Modelling hospital costs to produce evidence for policies that promote equity and efficiency

Third party payers for health care, when introducing policies to promote equity, through formulas for resource allocation by capitation, and efficiency, through prospective payment by case-mix, have sought to make adjustments for “unavoidable” hospital costs, which are caused by structural characteristics and are beyond the scope of local hospital management. To date, however, most published studies of such estimates have been inadequate. This paper reports the development of a generalisable model that aims to produce sound estimates of “unavoidable” hospital costs and shows how this stochastic multilevel model can be used to estimate unavoidable costs per unit of measurable output, identify sources of allocative inefficiency, and capture systematic variations in costs between different types of hospitals, through prospective payment by case-mix or formulas for resource allocation by capitation The application of the model to Portuguese hospitals has identified various causes of allocative inefficiencies: centrally-determined distributions of beds and doctors, a lack of local flexibility, systems with perverse incentives, and the existence of diseconomies of scale.