A comparison of the effects of per case and per diem based charges on the distribution of hospital costs across employer groups.

In response to continuing health care cost increases, many employers have expressed interest in a case-mix hospital payment system. They believe that such a system will more accurately reflect their utilization of health care resources and assist them in better controlling their costs. Therefore, using data generated by the Experimental Hospital Case Mix Payment Program of Blue Cross of Western Pennsylvania, this paper compares employer group costs based on an average cost per diagnostic case with costs based on an average cost per day. The analysis shows that by changing the basis of employer group costs from the traditional per diem method to one based on diagnostic case, while some groups may benefit in the form of lower costs, many groups would experience substantial increases to their costs. In a model explaining differences in employer group costs between the two payment methods, patient diagnosis was found to be the major explanatory factor, contributing to two thirds of the total explained variation. In addition, results indicated that a group's total admissions, mean patient age and gender, and a hospital's teaching status, location, bed size, occupancy rate, and mean ancillary costs influence the differences in a group's costs under the two methods.