Comparison of Cost Center–Specific vs Hospital-wide Cost-to-Charge Ratios for Operating Room Services at Various Hospital Types | Health Care Reform | JAMA Surgery | JAMA Network
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Table 1.  Hospital-wide vs Cost Center–Specific CCRs for California Hospitals in Fiscal Year 2015a
Hospital-wide vs Cost Center–Specific CCRs for California Hospitals in Fiscal Year 2015a
Table 2.  Surgery and Recovery CCRs Stratified by Hospital Status and Ownership Status for California Hospitals in Fiscal Year 2015
Surgery and Recovery CCRs Stratified by Hospital Status and Ownership Status for California Hospitals in Fiscal Year 2015
1.
Cerullo  M, Chen  SY, Dillhoff  M, Schmidt  C, Canner  JK, Pawlik  TM.  Association of hospital market concentration with costs of complex hepatopancreaticobiliary surgery.  JAMA Surg. 2017;152(9):e172158. doi:10.1001/jamasurg.2017.2158PubMedGoogle ScholarCrossref
2.
Haider  AH, Obirieze  A, Velopulos  CG,  et al.  Incremental cost of emergency versus elective surgery.  Ann Surg. 2015;262(2):260-266. doi:10.1097/SLA.0000000000001080PubMedGoogle ScholarCrossref
3.
Childers  CP, Maggard-Gibbons  M.  Understanding costs of care in the operating room.  JAMA Surg. 2018;153(4):e176233. doi:10.1001/jamasurg.2017.6233PubMedGoogle ScholarCrossref
4.
Kaplan  RS, Anderson  SR.  Time-Driven Activity-Based Costing: A Simpler and More Powerful Path to Higher Profits. Boston: Harvard Business School Press; 2007.
5.
Lassman  D, Sisko  AM, Catlin  A,  et al.  Health spending by state 1991-2014: measuring per capita spending by payers and programs.  Health Aff (Millwood). 2017;36(7):1318-1327. doi:10.1377/hlthaff.2017.0416PubMedGoogle ScholarCrossref
6.
Stey  AM, Brook  RH, Needleman  J,  et al.  Hospital costs by cost center of inpatient hospitalization for medicare patients undergoing major abdominal surgery.  J Am Coll Surg. 2015;220(2):207-17.e11. doi:10.1016/j.jamcollsurg.2014.10.021PubMedGoogle ScholarCrossref
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    Research Letter
    Pacific Coast Surgical Association
    March 20, 2019

    Comparison of Cost Center–Specific vs Hospital-wide Cost-to-Charge Ratios for Operating Room Services at Various Hospital Types

    Author Affiliations
    • 1Department of Surgery, David Geffen School of Medicine at University of California, Los Angeles, Los Angeles
    JAMA Surg. 2019;154(6):557-558. doi:10.1001/jamasurg.2019.0146

    With value-based payment programs, accurate measures of cost are necessary for physicians and hospitals to remain financially viable. Administrative databases, such as the National Inpatient Sample, rely on hospital cost-to-charge ratios (CCRs) to convert patient billing charges to estimated hospital costs.1,2 However, using a single conversion factor on all patient charges within a hospital may be an oversimplification, particularly for surgical costs, and may lead to inaccurate estimates. We assessed whether the cost center–specific CCR for operating room services differs from the general hospital-wide CCR and whether this deviation varies by hospital type.

    Methods

    Fiscal year 2015 financial statements from acute care hospitals in California were analyzed from June to December 2018. Details of the statement structure, inclusion criteria, and exclusion criteria are described elsewhere.3 Cost-to-charge ratios were calculated within each hospital by dividing total costs by total charges for the hospital (hospital CCR) and within each cost center by dividing total costs by total charges for that cost center (cost center–specific CCR). We focused on the surgery and recovery cost center (surgery CCR), which included direct costs (eg, salaries and supplies) and indirect costs of managing the operating room and recovery room.3 The data for this study are publicly available and do not meet the definition of human participants research. As such, institutional review board approval was not indicated, which we confirmed with the institutional review board of the University of California, Los Angeles, before starting the project.

    Within each hospital, differences between the cost center–specific CCR and the hospital CCR were calculated. We then pooled hospital differences and calculated the statewide median. Interpretation of this statewide median was the systematic bias of using the hospital CCR instead of the cost center–specific CCR. Finally, we compared surgery CCRs by hospital teaching status and ownership (ie, government, for-profit, and not-for-profit facility). Bivariate comparisons were made using nonparametric tests with statistical significance determined using 2-sided tests and α = .05.

    Results

    Of the 300 acute care hospitals reporting surgical expense information in 2015, 289 had plausible CCRs (between 0 and 1) and were included in this analysis. The median hospital CCR was 0.25 (interquartile range [IQR], 0.21-0.30) and the median surgery CCR was 0.19 (IQR, 0.13-0.26); the surgery CCR was lower than the hospital CCR (−24.4%, IQR, −40.3% to −7.4%; absolute difference, 5.8 percentage points [IQR, 1.8-9.9]) (Table 1). Cost centers with lower CCR than the hospital CCR included the clinical laboratory (median relative difference, −41.9% [IQR, −52.3% to −28.4%]), anesthesia (−71.3% [IQR, −80.7% to −45.2%]), and computed tomography (−74.0% [IQR, −79.1% to −68.2%]); cost centers with higher CCR than the hospital CCR included the medical/surgical intensive care unit (50.3% [IQR, 24.8%-77.2%]), medical/surgical unit (59.4% [IQR, 31.1%-96.4%]), and the blood bank (63.4% [IQR, 2.9%-162.0%]).

    The median surgery CCRs were similar at teaching and nonteaching hospitals (0.21 [IQR, 0.16 to 0.33] vs 0.19 [IQR, 0.13 to 0.25]; P = .12) and were higher at government-owned facilities (0.26 [IQR, 0.22 to 0.40]) compared with not-for-profit (0.19 [IQR, 0.14 to 0.24]) or for-profit facilities (0.16 [IQR, 0.11 to 0.22]) (P < .001) (Table 2). Surgery CCRs deviated less from hospital CCRs at government-owned (−18.2 [IQR, −39.3 to 13.6]) and for-profit facilities (−18.3 [IQR, −33.6 to 7.5]) compared with not-for-profit facilities (−27.8 [IQR, −41.7 to −13.0]) (P = .002).

    Discussion

    Mean hospital charges were 4 times higher than hospital costs, but this difference was approximately 25% higher for the surgery cost center. Therefore, the use of hospital CCRs may overestimate costs for surgical patients. For example, an $8000 charge for an outpatient cholecystectomy procedure would be estimated as a $2000 cost using a hospital CCR when the actual cost is closer to $1500 using the surgery CCR. This bias would be exaggerated for patients with short or negligible inpatient stays and may be especially problematic when comparing medical and surgical therapies. There may be an additional bias of using hospital CCRs when comparing hospitals by ownership, overestimating surgical costs for not-for-profit hospitals more than for government-owned facilities and for-profit facilities.

    This study has several limitations. First, use of cost-center CCRs improved the accuracy of cost estimates compared with hospital CCRs; however, alternative approaches, such as time-driven activity-based costing are more accurate and actionable.4 Second, our data came from a single state, which limited generalizability; however, California is a large and diverse state with per capita health care spending near the nation’s mean.5

    Conclusions

    Clinicians and payers will increasingly rely on accurate measures of cost to make value-based treatment decisions and to ensure financial solvency. Cost-center specific CCRs can be generated6 and our findings suggest they should be used to provide more accurate measures of the cost of surgical care.

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    Article Information

    Accepted for Publication: December 28, 2018.

    Corresponding Author: Christopher P. Childers, MD, Department of Surgery, David Geffen School of Medicine at University of California, Los Angeles, 10833 Le Conte Ave, Center for Health Sciences 72-247, Los Angeles, CA 90095 (cchilders@mednet.ucla.edu).

    Published Online: March 20, 2019. doi:10.1001/jamasurg.2019.0146

    Author Contributions: Dr Childers had full access to all of the data in the study and takes responsibility for the integrity of the data and the accuracy of the data analysis.

    Concept and design: Childers.

    Acquisition, analysis, or interpretation of data: All authors.

    Drafting of the manuscript: Childers.

    Critical revision of the manuscript for important intellectual content: All authors.

    Statistical analysis: Childers, Dworsky.

    Obtained funding: Childers.

    Supervision: Russell, Maggard-Gibbons.

    Conflict of Interest Disclosures: None reported

    Funding/Support: This analysis was funded by grant F32HS025079 (Dr Childers) from the Agency for Healthcare Research and Quality.

    Role of the Funder/Sponsor: The Agency for Healthcare Research and Quality had no role in the design or conduct of the study; collection, management, analysis, and interpretation of the data; preparation, review, or approval of the manuscript; or the decision to submit for publication.

    Meeting Presentation: This paper was presented at the Pacific Coast Surgical Association Annual Meeting; February 16, 2019; Tucson, Arizona.

    References
    1.
    Cerullo  M, Chen  SY, Dillhoff  M, Schmidt  C, Canner  JK, Pawlik  TM.  Association of hospital market concentration with costs of complex hepatopancreaticobiliary surgery.  JAMA Surg. 2017;152(9):e172158. doi:10.1001/jamasurg.2017.2158PubMedGoogle ScholarCrossref
    2.
    Haider  AH, Obirieze  A, Velopulos  CG,  et al.  Incremental cost of emergency versus elective surgery.  Ann Surg. 2015;262(2):260-266. doi:10.1097/SLA.0000000000001080PubMedGoogle ScholarCrossref
    3.
    Childers  CP, Maggard-Gibbons  M.  Understanding costs of care in the operating room.  JAMA Surg. 2018;153(4):e176233. doi:10.1001/jamasurg.2017.6233PubMedGoogle ScholarCrossref
    4.
    Kaplan  RS, Anderson  SR.  Time-Driven Activity-Based Costing: A Simpler and More Powerful Path to Higher Profits. Boston: Harvard Business School Press; 2007.
    5.
    Lassman  D, Sisko  AM, Catlin  A,  et al.  Health spending by state 1991-2014: measuring per capita spending by payers and programs.  Health Aff (Millwood). 2017;36(7):1318-1327. doi:10.1377/hlthaff.2017.0416PubMedGoogle ScholarCrossref
    6.
    Stey  AM, Brook  RH, Needleman  J,  et al.  Hospital costs by cost center of inpatient hospitalization for medicare patients undergoing major abdominal surgery.  J Am Coll Surg. 2015;220(2):207-17.e11. doi:10.1016/j.jamcollsurg.2014.10.021PubMedGoogle ScholarCrossref
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