Estimating the hospital-wide cost differentials warranted for teaching hospitals. An alternative to regression approaches.

Under Medicare's Prospective Payment System, teaching hospitals receive additional reimbursements, vis-à-vis nonteaching hospitals, for both "direct" teaching expenses and for "indirect" expenses. They totaled $3.1 billion in fiscal year 1989. The authors propose and illustrate a non-regression-based, nonparametric method for viewing the total hospital-wide reimbursement differential warranted for teaching hospitals, a method utilizing a peer grouping of like hospitals to estimate two different "best practices" cost frontiers. The hospital's efficiently delivered cost to meet all of the hospital's actual service outputs, including its teaching mission, and delivered level of quality of care, is compared to the corresponding cost when only the teaching mission is excluded. The difference in these costs for a particular hospital can be used to estimate a suggested lump sum Medicare reimbursement add-on, in recognition of the hospital's teaching mission. The approach is illustrated using a subset of the Health Care Financing Administration's 1988 hospital data set, with comparisons of actual and suggested reimbursements provided.