The use of regression analysis to determine hospital payment: the case of Medicare's indirect teaching adjustment

Abstract

Although the intention of Medicare policy makers was to use only "legitimate" cost differences to adjust teaching hospital payment rates under the prospective payment system (PPS), the actual calculations implicitly recognized others. In this paper I question whether these implicit costs should be passed through, and whether regression analysis was used correctly to establish reimbursement rates for hospitals under PPS. Conducting regression analyses on a more inclusive set of variables than the Health Care Financing Administration (HCFA) used to establish its adjustments, I conclude that costs in teaching hospitals rise only 3.15% for each .1 increment in the resident-to-bed ratio, far lower than HCFA's original 11.59% adjustment and substantially lower than the current adjustment of 7.7% for indirect costs.