Characterizing Measurement Error in Hospital Cost Reports

Hospitals occupy a central role in the US health care system. One-third of all health care spending occurs in hospitals and two-thirds of uncompensated medical care is provided by hospitals. Public subsidies such as tax exemptions, disproportionate share payments, and the 340B program target hospitals. Numerous recent health policies, including the Affordable Care Act, focus on hospitals. For these reasons, studies of hospitals operation, particularly hospital financial characteristics, are both important and a necessary aspect of policy analysis. However, the only source of publicly available, longitudinal hospital financial data, the Hospital Cost Reports are self-reported and can differ significantly from audited statements. Although discrepancies between audited statements and hospital cost reports have been documented, no research considers whether measurement error is random or correlated with key hospital characteristics and policies. I link cost report data from 7 states (AZ, FL, MA, ME, OR, PA, WA) to audited hospital financial data. My analysis illustrates that errors in two key financial measures, the operating margin and uncompensated care, are correlated with several important hospital characteristics. I also propose solutions to minimize bias from non-classical measurement error in analyses of hospital cost reports.