Special Article
Hospital Cost Containment in the 1980s — Hard Lessons Learned and Prospects for the 1990s
N Engl J Med 1991; 324:1037-1042April 11, 1991
- Abstract
- Abstract
Background.
A key strategy used to contain hospital costs during the 1980s was to reduce the total number of admissions and average lengths of stay. We assessed the magnitude of the savings achieved, the effect of the reductions on the rate of increase in costs, and the prospects for future savings through reductions in the number of days patients spend in the hospital (inpatient days).
Methods.
Using data from the American Hospital Association and the Health Care Financing Administration, we calculated the savings in the total number of inpatient days as the deviation from the historical increase in the number of inpatient days per year. We then estimated the real increase in costs that would have been observed if the reduction in the number of inpatient days had not occurred; we defined this value as the "underlying" rate of increase in costs. Finally, we compared the rates of increase in hospital reimbursement for Medicare beneficiaries and patients not covered by Medicare (non-Medicare patients).
Results.
The total number of inpatient days per year decreased by 28 percent, in aggregate, between 1981 and 1988. The annual reduction was greatest in 1984 and 1985 and became progressively smaller in each subsequent year; by 1988 there was virtually no further reduction in the total number of inpatient days. The brief slowing of the increase in costs in the mid-1980s can be attributed entirely to the reduction in the number of inpatient days per year. The underlying rate of increase in costs was thus unaffected by efforts to contain spending. An increased number of outpatient visits partially offset the savings that resulted from the reduction in the number of inpatient days. This increase persisted even when the savings due to the lower number of inpatient days dwindled, and it virtually eliminated any dollar savings during the latter part of the 1980s. Between 1976 and 1982, Medicare spending on services provided by acute care hospitals rose by 9.2 percent per year in real terms, whereas non-Medicare expenditures rose by only 4.6 percent. This pattern has been reversed in recent years; in 1987–1988, Medicare spending rose by only 0.6 percent per year, whereas non-Medicare spending rose by 9 percent.
Conclusions.
Our findings suggest that the era of easy reductions in the number of inpatient days, with the associated attenuation of rising costs, is largely over. If further reductions in inpatient days are accompanied by an increase in the amount of ambulatory care similar to that during the past few years, the net savings will probably be negligible. Once the potential savings due to reductions in the number of inappropriate inpatient days has been exhausted, real hospital costs can be expected to rise, unless other effective measures to contain costs are implemented. (N Engl J Med 1991; 324:1037–42.)
Media in This Article
Figure 1
Observed and Imputed Reductions in the Number of Inpatient Days per Year, 1982 through 1988.Figure 2
Observed and Underlying Annual Increases in Real Hospital Costs, 1976 through 1988.Article Activity
- Article
THROUGHOUT the 1980s, both the private sector and the federal government energetically attempted to contain the continuing increase in the costs of hospital care. A key part of their strategy has been to eliminate unnecessary hospital days and to shift as much care as possible from inpatient to outpatient settings. As a result of these efforts, the annual number of days patients spent in the hospital (inpatient days) fell, and the rate of increase in costs was slowed. On the basis of these findings, many observers believe that further efforts to eliminate inappropriate inpatient days, particularly through the use of new practice guidelines, can solve the problem of rising costs.
In the present study we used published and unpublished data from the American Hospital Association (AHA) and the Health Care Financing Administration (HCFA) to address these issues. First, we assessed the degree to which the total number of inpatient days per year was reduced during the 1980s and the effect of this reduction on the increase in hospital costs. Second, we estimated the rate of increase in costs that would have occurred had there been no reduction in the number of inpatient days. Third, we calculated the increase in hospital costs that could be attributed to the increased use of outpatient services. Fourth, we compared the changes over time in Medicare expenditures and all other (non-Medicare) expenditures for hospital care. Finally, we estimated the potential savings from a further reduction in the total number of inpatient days per year.
The Number of Inpatient Days Saved
We first examined the cumulative percentage of inpatient days saved during the 1980s. To calculate the savings, we measured the cumulative reduction in the total number of inpatient days per year between 1981, when admissions peaked, and 1988, the most recent year for which data were available. The beginning of this period also marked the initiation of major cost-containment efforts, including prospective payment by Medicare and a variety of efforts in the private sector.
The reduction in the number of inpatient days in community hospitals between 1981 and 1988 was 18.6 percent (Table 1Table 1
Cumulative Changes in the Number of Inpatient Days per Year and the Contribution of Changes in Admissions and Length of Stay, 1981 through 1988.*).1 Although striking in itself, this percentage understates the actual reduction because it does not take into account the fact that the number of inpatient days in acute care hospitals had been increasing in previous years. Between 1976 and 1981, the total number of inpatient days in community hospitals rose at an annual rate of 1.3 percent.1 About 1 percentage point per year of this increase can be attributed to the growth and aging of the population, with the small remainder accounted for by other factors, such as technological innovation. Because the most important forces responsible for the historical increase in the annual number of inpatient days were acting throughout the 1980s, it is reasonable to assume that without cost-containment efforts the number of inpatient days would have continued to grow at a rate close to the historical rate.The total effect of cost-containment programs as a percentage of the number of inpatient days in 1981 could thus be calculated as the difference between the actual cumulative reduction in the number of inpatient days since 1981 and the estimated cumulative increase in inpatient days that would otherwise have occurred during this period. Our calculations indicated that 28.1 percent of inpatient days had been eliminated by 1988 (Table 1). We call this sum the "imputed reduction" in days.
The annual savings in inpatient days, both observed and imputed, is shown in Figure 1.Figure 1
Observed and Imputed Reductions in the Number of Inpatient Days per Year, 1982 through 1988. Each year from 1982 through 1985, the percentage of 1981 days saved increased dramatically; the largest savings occurred in 1985, when the imputed savings was 9.1 percent. In each of the following two years, the rate of savings slowed markedly, and by 1988 the imputed reduction in the number of inpatient days was only 1.5 percent.Contribution of Changes in the Number of Admissions
The total number of inpatient admissions fell by 13.4 percent between 1981 and 1988 but would have increased by 10.2 percent over this period if the historical trend had persisted (Table 1). The cumulative savings in the number of inpatient admissions during this period was thus 23.6 percent. To calculate the portion of the observed change in the number of inpatient days that was caused by the decrease in the number of inpatient admissions, we multiplied the cumulative change in admissions by the average length of stay over the period from 1981 through 1988 and divided the result by the number of inpatient days in 1981. The estimated reduction was calculated on the basis of the annualized change in the number of admissions from 1976 through 1981.
On an annual basis, the imputed savings in the number of inpatient days that was due to reductions in admissions peaked in 1985, with a reduction of 6.3 percent, and diminished during each subsequent year. Annual figures on the savings in inpatient days attributable to reductions in the number of admissions and the average length of stay are available elsewhere.*
Contribution of Changes in the Average Length of Stay
About 4.6 percentage points of the reduction in the number of inpatient days was due to reductions in the average length of hospital stays. The observed reduction was 5.2 percent, but on the basis of historical trends, the length of stay would have been expected to drop by 0.6 percentage point without cost-containment efforts (Table 1 ). To calculate the portion of the change in the number of inpatient days caused by reductions in length of stay, we multiplied the cumulative change in length of stay by the average number of admissions between 1981 and 1988 and divided the result by the average length of stay in 1981. Nearly all of these reductions were achieved in 1984 and 1985, and there were no reductions after 1985. In fact, during subsequent years the average length of stay increased slightly.
Savings in Inpatient Days According to Sector
There were considerable differences in the savings in inpatient days used by Medicare beneficiaries and patients not covered by Medicare (non-Medicare patients). To obtain the number of inpatient hospital days used by Medicare beneficiaries, we used unpublished figures on admissions to short-stay acute care hospitals from the HCFA2 and published figures on the average length of stay for Medicare beneficiaries in short-stay acute care hospitals.3 The number of inpatient days used by Medicare patients was subtracted from the total number of days used in the United States to obtain data for non-Medicare patients.
Between 1982 and 1988, the number of inpatient days used by Medicare patients was reduced by 20.7 percent from the levels in 1982, the year before cuts began in that sector (Table 2Table 2
Aggregate Changes in the Number of Inpatient Days Used by Medicare and Non-Medicare Patients between 1982 and 1988.*). When we calculated the deviation from the historical upward trend between 1976 and 1982, the cumulative imputed savings in the number of inpatient days for Medicare patients was 41.1 percent (Table 2). By contrast, the savings in the number of inpatient days used by non-Medicare patients between 1982 and 1988 was only 15.4 percent. Because there was no increase in the number of inpatient days used in the non-Medicare sector between 1976 and 1982, the imputed reduction in the number of days was close to the observed figure (Table 2).The Observed and Underlying Rates of Increase in Costs
The dramatic reductions in the number of inpatient days per year, documented above, raise a crucial question: Did these efforts have an effect on hospital costs? To answer this question, we first looked at what actually happened to hospital costs during the 1980s. We then estimated the increase in costs that would have occurred in the absence of reductions in the number of inpatient days.
The Observed Increase in Costs
The annual real increase in community-hospital costs is shown in Figure 2Figure 2
Observed and Underlying Annual Increases in Real Hospital Costs, 1976 through 1988..1 , 4 During the five-year period immediately before 1982, the average annual increase in hospital costs was 6.1 percent. In 1982 costs rose by 8.7 percent, but by 1984 the annual increase in costs had fallen to a low of 2.2 percent. It then rose steadily, reaching 7.2 percent by 1988. All dollar figures reported here have been adjusted to eliminate the influence of economy-wide inflation.4 The Underlying Rate of Increase in Costs
To what degree can the attenuation in the rate of increase in costs in the mid-1980s be attributed to reductions in the number of inpatient days per year? To answer this question, we estimated the increase in costs that would have occurred if there had been no reduction in inpatient days. We call this value the "underlying" rate of increase in costs. This value was calculated by adding the dollar savings due to the reduced number of inpatient days to the observed increase in costs (Fig. 2).1 , 4
The dollar savings due to reductions in the number of inpatient days was calculated by multiplying the percent reduction in the number of days by an estimate of how much costs are reduced when inpatient days are eliminated. To measure the reduction in days, we used the number of "adjusted patient days" — a figure calculated by the AHA to take into account both inpatient days and outpatient visits. As discussed earlier, we estimated the savings in adjusted patient days as the deviation from the increase between 1976 and 1981. To measure the reduction in costs that resulted from a decrease in the number of hospital days, we started with an estimate of what the typical hospital might expect to save, after adjusting to the new level of occupancy (typically called the "long-run marginal cost"). Pauly and Wilson have estimated that the long-run marginal cost of a hospital day is 90 percent of the average cost5; the difference between this value and the average cost is accounted for by fixed costs (such as those of administration, insurance, and heat), which persist in the face of small reductions in the occupancy rate. There are, however, two factors that probably caused the savings to hospitals to be lower during this period. First, it takes time for hospitals to adjust to operating efficiently after making reductions in the number of patient days. Second, it is possible that the cost of the patient days eliminated during this period was lower than that of the typical marginal hospital day, because the patients may have been less sick than average. For this reason, we assumed that the cost of the days saved was only 65 percent of the average patient day. We thus calculated the savings achieved by the reduction in the number of inpatient days by multiplying the percent reduction in adjusted patient days by 0.65.
The annual savings due to the reduced number of inpatient days is shown as the upper (hatched and open) portions of each bar in Figure 2 (the upper portion is divided into savings from reduced admissions and reduced length of stay). The total height of each bar represents the increase in costs that would have occurred if there had been no reduction in the number of adjusted patient days. In every year between 1982 and 1988, the underlying rate of increase exceeded 6 percent, the real increase in costs between 1976 and 1981. The attenuation of the rate of increase in costs in the mid-1980s can thus be attributed entirely to the reduction in the number of inpatient days.
The Effect of Outpatient Care within the Hospital
As the number of inpatient days has fallen, the number of outpatient visits to the hospital has risen. Figure 3Figure 3
Impact on Hospital Costs of Reductions in the Number of Inpatient Days and Increases in the Number of Outpatient Visits, 1982 through 1988. shows the effect of this phenomenon on costs; the reduction in costs due to fewer inpatient days is plotted downward, whereas the offsetting increase in costs from increased visits for ambulatory care is plotted upward. We used annual data from the AHA1 to calculate the increase in outpatient costs and adjusted for economy-wide inflation as described above.4 As shown in Figure 3, the increase in costs due to the increase in outpatient visits remained at about 1.2 percentage points per year between 1984 and 1988.The Increase in Medicare and Non-Medicare Costs
The pattern of increases in costs for the Medicare and non-Medicare sectors over time has changed remarkably. To assess Medicare spending on hospital care, we obtained unpublished data on actual disbursements to acute care hospitals for inpatient care under Medicare Part A6 , 7 and on spending for outpatient care for beneficiaries of Supplementary Medical Insurance (Medicare Part B).8 We aggregated data on inpatient and outpatient care in order to make our figures compatible with the total expenditures for care at community hospitals reported by the AHA. We used actual disbursements to acute care hospitals rather than the standard time series on Medicare hospital spending published in the HCFA review, because the published data included spending on long-term care hospitals, home care, and other facilities not included in the AHA data.9
Table 3Table 3
Observed Annual Increases in Real Hospital Costs in the Medicare and Non-Medicare Sectors, 1976 through 1988.* shows the rates of increase in overall spending for hospital services by Medicare and by all payers other than Medicare. Between 1976 and 1982, Medicare expenditures rose by 9.2 percent per year, whereas non-Medicare expenditures rose by 4.6 percent per year. By 1987 and 1988, this pattern had been reversed; Medicare expenditures for hospital services rose by only 0.6 percent per year, whereas non-Medicare spending rose by about 9.0 percent per year.Discussion
Between 1981 and 1988, a period of intense cost-containment efforts, there was an observed decrease of 19 percent in the total number of inpatient hospital days. This figure understates the real savings, however, because inpatient days have historically been increasing by more than 1 percent annually and would have been expected to continue increasing in the absence of cost-containment efforts. In terms of the deviation from the historical upward trend, we estimated that inpatient days were reduced by more than 28 percent between 1981 and 1988.
The year-by-year pattern of reductions is perhaps of even greater relevance, since it suggests that further savings will be difficult to achieve. After a steady increase in the percentage of days saved through 1985, the fraction of days saved shrank each year, so that by 1988 there was virtually no further savings (Fig. 1). This near-halt in the number of inpatient days saved merits particular attention, because it occurred in the face of continuous expansion of managed care and other initiatives designed to reduce the number of inpatient days overall.
Figure 2 shows the effect of the reduction in inpatient days on the increase in hospital costs. The solid bars, depicting the increase in real costs, indicate that the increase in costs slowed from a historical average of over 6 percent per year to about 2 percent per year by 1985. By 1988, the increase in costs had returned to a level above 6 percent.
A comparison with Figure 1 indicates that it was during the years in which the increase in costs was slowed that the bulk of the savings in the number of inpatient days was realized. The hatched bars quantify this observation by adding to the real increase the estimated additional increase in costs that would have occurred in the absence of reductions in the number of inpatient days.
The full height of each bar in Figure 2 thus represents our estimate of the increase in costs that would have occurred if there had been no reduction in the number of inpatient days. This value, which we call the "underlying" rate of increase in costs, exceeded 6 percent in each year throughout the 1980s. Because in the late 1980s this value was not appreciably different from that in the late 1970s and early 1980s, we conclude that efforts to contain costs did little to limit expenditures beyond decreasing the total number of inpatient days per year. Moreover, it seems likely that the upward pressure on costs will continue in the future, as a result of wage increases required to attract and hold personnel, a wave of expensive new forms of technology, a growing number of patients with the acquired immunodeficiency syndrome, and a new commitment to insurance coverage for the uninsured and underinsured.
Our calculations include only changes in expenditures for acute care in hospitals and do not indicate the overall effect of these changes on system-wide expenditures for health care. When care is transferred to free-standing ambulatory care facilities and physicians' offices, the resulting costs partially offset the savings accomplished in hospital-based care. Because there are no readily available measures of care shifted to settings outside the hospital, we have been unable to calculate the net savings to society.
Prospects for Future Savings in the Number of Inpatient Days
The sharp slowing in the number of inpatient days saved per year (Fig. 1) suggests that a further substantial reduction in inpatient days will be hard to achieve unless new practice guidelines are successfully implemented. We also believe that the data indicate that whatever further reductions are likely to be achieved will have only a limited and transient effect on costs.
To illustrate this point, we estimated the effect on costs of saving a total of 20 percent more inpatient days between 1989 and 1995, for a total reduction of nearly 50 percent of inpatient days since 1981. Assuming that each day eliminated saves 65 percent of the cost of an average day of inpatient care, the increase in expenditures would be reduced by 2 percentage points annually. But because a decrease in the number of inpatient days would almost inevitably be accompanied by an increase in visits for ambulatory care (Fig. 3), a reduction of this magnitude would probably not be observed. If the increase in the number of visits for ambulatory care were equal to that in 1987 and 1988, much or all of the savings from cutbacks in inpatient care would be offset.
Equally important, if by the mid-1990s we are successful in eliminating nearly all remaining inappropriate inpatient days, no further cutbacks will be available to mask the underlying rate of increase in costs. Only if other cost-containment measures are put in place will the control of costs be possible.
Differences between the Medicare and Non-Medicare Sectors
The aggregate figures just discussed conceal important differences between the rate of increase in Medicare and non-Medicare expenditures. Most notably, between 1982 and 1988 the number of inpatient days used by Medicare patients fell by 41 percent, whereas the number of days used by non-Medicare patients fell by only 15 percent (Table 2). This finding indicates either that most of whatever days remain to be saved are in the non-Medicare sector, or that the fraction of unnecessary days originally present in the Medicare sector was substantially larger than that in the non-Medicare sector.
The pattern of increase in costs in the two sectors was also remarkably different. Between 1976 and 1982, real costs to Medicare rose at about twice the rate in the non-Medicare sector; between 1982 and 1988 the situation was completely reversed. Medicare expenditures under the prospective payment system fell steadily, so that by 1987 and 1988 the increase averaged only 0.6 percent per year. By contrast, the increase in non-Medicare expenditures accelerated to almost 9 percent per year during this period. It is important to note that the large increases in Medicare costs that have been reported in the popular press have been driven to a considerable extent by Medicare payments to physicians, which rose by more than 11 percent annually in 1987 and 1988.10
These data clearly indicate that the private sector is carrying a steadily increasing share of the responsibility for maintaining the quality of care for both Medicare and non-Medicare patients in the hospital. How long this burden will be accepted by private payers remains uncertain.
We are indebted to Joseph P. Newhouse, Ph.D., Harvard Medical School, and Peter W. Van Etten, University of Massachusetts Medical Center, for their helpful comments and criticisms and to Bernice M. Golder for valuable assistance in the preparation of the manuscript.
Source Information
From the Department of Medicine, Tufts University School of Medicine, 136 Harrison Ave., Boston, MA 02111, where reprint requests should be addressed to Dr. Schwartz.
- References
References
*
See NAPS document no. 04857 for two pages of supplementary material. Order from NAPS c/o Microfiche Publications, P.O. Box 3513, Grand Central Station, New York, NY 10163–3513. Remit in advance (in U.S. funds only) $7.75 for photocopies or $4 for microfiche. Outside the U.S. and Canada add postage of $4.50 ($1.50 for microfiche postage). There is an invoicing charge of $15 on orders not prepaid. This charge includes purchase order.
1
Hospital statistics, 1976–1988 editions. Chicago: American Hospital Association, 1976–1988.
2
Bureau of Data Management and Strategy. Table AN-3A: number of admission notices processed since 7/1/66 by state and calendar year as of August 1989. Baltimore, Md.: Health Care Financing Administration.
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7
Idem. Table AA4-TOTAL: hospital insurance, number of inpatient hospital bills, total and covered days of care, total and covered charges and amount reimbursed by period, expense incurred, and type of hospital as of August 25, 1989. Baltimore, Md.: Health Care Financing Administration.
8
Idem. SMI-1 Medicare: estimated supplementary medical insurance disbursements, calendar years 1966–1988. Baltimore, Md.: Health Care Financing Administration, June 21, 1989.
9
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