Rural hospital costs: An analysis with policy implications

The 1977 National Guidelines for Health Planning suggest a maximum of 4 hospital beds per 1,000 population and a minimum occupancy rate of 80 per cent for those beds as desirable for an efficient local hospital system. Rural areas often have more than 4 hospital beds per 1,000 population and generally exhibit occupancy rates well below the rate specified by the Guidelines. Hence, there appears to be an opportunity for reducing the cost of hospital services in rural areas by providing care with fewer beds concentrated in larger, better utilized facilities. This paper presents estimates of the annual savings that would result from following such a policy in rural areas. The statistically estimated cost curves are based on data from a sample of 116 rural hospitals for the years 1971-77. With a quadratic specification for the cost function, the hospital size that minimizes average costs is estimated to be 113 beds, and the occupancy rate that minimizes costs is 73 percent. Hospitals with 113 beds are estimated to have average costs per patient day that are $6.51 (logarithmic specification) to $15.15 (quadratic specification) below the average cost per patient day of a 41-bed hospital, the average size of the hospitals in the sample. Hospitals with a 73 percent occupancy rate are estimated to have average costs that are $5.96 logarithmic specification to $11.75 (quadratic specification) lower than the average costs in hospitals with 51 percent occupancy rates, the average in the sample, if other factors are held constant. These benefits can be weighed by health policy analysts against the increased cost of travel and ambulance service, and the accompanyng increase in risk to patients, to determine if the present structure for the delivery of acute care in rural areas warrants change.