Examining cost variation across hospital departments--a two-stage multi-level approach using patient-level data.

Studies of hospital efficiency seldom lead to changes in practice, partly because recommendations are unspecific or results are not seen as robust. We describe a method to compare hospital costs that utilises patient-level data. We perform a two-stage analysis in which we first consider factors that explain costs among patients and then across hospital departments. We illustrate our approach by examining the costs and characteristics of almost one million patients admitted to 136 English NHS hospital obstetrics departments in 2005/2006. We identify those departments with significantly higher costs that need to take action.