Hospital cost containment and length of stay: An econometric analysis

In recent years, concern in the United States over rising health care costs has led to precipitous reductions in the lengths of hospitalizations. While perceptions of compromised medical care quality following this practice and others have prompted policy makers to consider stricter regulation of health insurance organizations, little attention has been given to the extent to which length of stay reductions are responsible for decreasing hospital costs. This paper provides empirical evidence on that point. The method utilizes a hospital total operating cost function estimated on 2792 U.S. hospitals for the period 1987-1992. Three different panel data estimating techniques are applied, including a random effects model that is distinctive in allowing for correlation between hospital effects and observable regressors, circumventing inconsistency problems following from standard generalized least-squares estimations. The cost elasticity of length of stay is calculated from the regression results. This measure is low, falling in the range 0.09-0.12. It suggests that common perceptions regarding the extent of cost savings resulting from length of stay reductions have been overestimated.