The Association between Safety-Net Hospitals' Quality of Care and Cost Inefficiency: A Stochastic Frontier Analysis through the Great Recession

In the United States, the importance of increasing cost efficiency for safety-net hospitals has been underscored by the Great Recession and the ever-changing health care reimbursement environment. Safety-net hospitals play a major role in the provision of low-margin services and medical care access for the poor. These integral providers have been demonstrated to be especially financially disadvantaged. This weaker financial status hinders their ability to uphold their valued mission and requires that they achieve cost efficiency improvements. Previous studies have shown mixed evidence with regards to the relationship between linking hospitals’ reimbursement to quality of care and cost efficiency. However, little is known about how hospital cost efficiency fared throughout the Great Recession. Using stochastic frontier analysis, with controls for patient burden of illness, hospital process of care quality, and hospital outcome quality, we estimated California safety-net hospitals’ cost efficiency for the years 2005 to 2013. In the case of process of care, we created three different quality indexes for three health conditions (acute myocardial infarction (AMI), pneumonia (PN), and heart failure (HF)) following the methodology proposed by the Joint Commission on Accreditation of Healthcare Organizations. In particular, we calculated a summary score for each of the three conditions by summing the ratio of the number of times an appropriate action was performed by the total number of cases the hospital should have administered the treatment. The quality measures included in this study function as central measures for the determination of recently implemented pay-for-performance programs. The average estimated level of hospital cost inefficiency increased from 10.06 percent to 14.25 percent during the Great Recession and leveled off at 14.03 percent in succeeding years. Further, the estimated coefficients for the summary process of care quality indexes for three health conditions (AMI, PN, and HF) suggest that higher quality scores are associated with increased cost inefficiency. In recognition of safety-net hospitals’ vital role in the health care system, the uncertainty surrounding uncompensated care, and the planned erosion of disproportionate-share hospital payments, it is pertinent to assess their cost efficiency through the Great Recession.