DRG cost weight volatility and hospital performance

We develop a robust methodology which estimates the consequences of DRG cost weight volatility on hospital performance. The methodology is first developed using the hospital baserate as quantitative measure of hospital performance, then analyzed theoretically in the more general framework of cost-benefit analysis, and finally applied to two groups of hospitals. The first data set consists of a homogeneous group of 21 maximum-care hospitals in Germany and incorporates approximately 936,000 inpatient cases in 2003. The second data set consists of a heterogeneous group of 97 German hospitals and incorporates approximately 896,000 inpatient cases in 2003. The main finding is that the robust cost-benefit methodology developed in this study leads to results that are consistent with the theoretical background, since the hospital baserate spread in the more homogeneous group of hospitals is clearly lower than in the more heterogeneous group of hospitals. Our methodology illustrates the robustness of a hospital’s performance with respect to DRG cost weight changes and, therefore, represents a helpful tool in discussions about hospital budgets, strategic alliances, mergers, etc.