Hospital reserve margins: structural determinants and policy implications using cross-section data.

• Author: Graham, Glenn G.

As is well known, hospitals - like electric utilities, urban freeways and telecommunication systems - do not generally operate at full capacity. The reasons are essentially twofold - uncertain demand for hospital services and the high cost of changing capacity quickly. In the case of hospitals, the resulting excess bed capacity is known as reserve margin and plays a key role in determining costs, efficiency and the potential benefits of both increased competition and hospital consolidation. The purpose of this study is to analyze the determinants of hospital reserve margins using a recent cross section of U.S. short-term care hospitals.

A number of empirical hospital studies have looked at the relationship between hospital costs and excess capacity - or excess capacity and its relationship to specific variables, e.g., hospital ownership, regulation or competition - but none have attempted a comprehensive analysis of the factors determining a hospital's reserve margin using recent data. For example, in a pioneering study Joskow [7] looked at the relationship between reservation quality - a concept closely related to reserve margin - and both certificate-of-need (CON) regulation and hospital competition. His model, however, assumed a Poisson hospital-admissions distribution, did not include a broad range of variables (other than CON and market structure variables) and used 1976 data on 346 private nonprofit U.S. hospitals. A more recent study by Mayo and McFarland [10] also looked at the impacts of regulation and market structure on hospital costs and hospital bed growth using data for 120 short-stay Tennessee hospitals over the period 1980-1984, but did not focus specifically on factors determining hospital reserve margins. Finally, a recent and innovative study of excess capacity by Gaynor and Anderson [4] used a cost function model derived for stochastic demand and data on over 5000 U.S. hospitals for the period 1983-87. Their analysis, however, focused on the cost of excess capacity rather than on the specific causes. Thus, a number of interesting and useful empirical studies of hospital costs and excess capacity have been carried out recently, but none of them have focused directly on the issue of reserve margin determination using a broad set of potential explanatory factors.

The paper is organized as follows. The first section presents the reserve margin model used in this study, followed by a discussion of data issues. Our empirical results are included in the third section, and the paper concludes with a brief discussion of research implications.

1. Reserve Margin Model

   A hospital's reserve margin, typically measured in terms of excess beds, is the result presumably of a decision which takes a number of both demand and supply factors into account, including the demographic, market, regulatory and medical environments within which the hospital operates. In addition, the type, size, complexity and teaching status of the hospital should also be regarded as determining factors. Thus, the reserve margin model can be written in general terms as:

   RESMARGN = f(HC, HSC, OWN, HIO, MS, REG, DEC) (1)

   where RESMARGN is the hospital's reserve margin; HC and HSC represent hospital and hospital service characteristics, respectively; OWN indicates ownership variables; HIO includes hospital internal organization features; MS represents market structure variables; REG includes hospital regulation variables; and DEC represents local demographic and economic characteristics.

   In this study, the hospital reserve margin is measured as

   RESMARGN = (statistical beds - average daily inpatient census)/statistical beds. (2)

   A statistical bed is defined by the American Hospital Association as a hospital bed which is set up and staffed, so that this type of excess capacity is available for use on fairly short notice. Hospital beds which are available but not staffed would take considerably longer to become operational, and thus were not included in our definition of reserve margin.

   Hospital Characteristics

   Perhaps the two most important hospital characteristics affecting the reserve margin are the price of hospital services (PRICE) and the total number of available hospital beds (BEDS). We use average inpatient revenue (inpatient revenue/inpatient days) as our measure of hospital service price since our reserve margin model focuses on the determinants of inpatient excess capacity. The total number of available beds represents a hospital size or capacity measure.(1) The price of inpatient services should have a positive impact upon reserve margin (holding size constant) since an increase in price should reduce the demand for hospital services. Hospital size as measured by beds should be negatively related to reserve margin, since although larger hospitals will require a larger absolute number of excess beds the relative amount of the excess capacity needed will be less.(2) Of course, the amount of excess hospital capacity needed (both absolute and relative) will also depend upon the degree to which hospital beds of different kinds (e.g., surgical, obstetrics, medical) are substitutable, but this relationship should be picked up by one of several casemix variables.

   In our analysis we include two separate casemix variables - CASEMIX and NUMWARDS - to account for differences in both the range and complexity of hospital casemix. Our CASEMIX variable is defined in terms of the number of casemix procedures performed by the hospital, while NUMWARDS reflects the number of hospital wards. While alternative measures of casemix could have been used, we think that these two measures are adequate for capturing casemix impacts on hospital reserve margin. If a hospital offers a wider range of services, as reflected by one or both of the casemix variables, it should be able to attract more admitting physicians and patients, thus enabling it to make more efficient utilization of its capacity. In either case, this should reduce the reserve margin.

   Two additional hospital characteristics were included, PROPMCARE measuring the proportion of Medicare to total inpatient days, and OPVIS/BD measuring the number of non-emergency outpatient visits per bed. As the proportion of Medicare patients in a hospital's caseload increases, the hospital's reserve margin should increase since Medicare patients have a greater likelihood of suffering additional complications after being admitted to the hospital. Such complications will increase the unexpected number of bed days that such patients may require. On the other hand, an increase in the number of nonemergency outpatient visits per bed should reduce the reserve margin (holding hospital size constant) if outpatient services are at least a partial substitute for inpatient services.

   Hospital Service Characteristics

   Our hospital service characteristics are meant to capture the quality dimension of hospital services, and include continuous measures of quality as well as several dummy variables. The hospital reserve margin should be negatively related to service quality in general since an increase in quality holding hospital size constant will increase the demand for services. This in turn will reduce excess capacity and hence the reserve margin. In addition, prospective non-emergency patients should be willing to wait longer for admission to higher quality hospitals, further reducing the need for excess capacity. Continuous measures of hospital service quality include ADDDAYS and MALPRAC/BD, while the quality-related dummy variables include MEDSCHOOL, JCAHACCRD and PPOAFFIL.

   ADDDAYS, an index of the number of days added to the expected lifetimes of Medicare patients by services provided by the hospital, is one of the measures of hospital service quality used in this study. This index was constructed with a zero mean, so that hospitals adding more days of life on average have positive index values (indicating higher relative quality) while hospitals adding fewer days of life on average have negative index values (indicating lower relative quality). MALPRAC/BD, a hospital's total expenditures on malpractice insurance per bed, is an inverse measure of quality since larger expenditures should reflect lower quality. Thus, the sign on the MALPRAC/BD coefficient should be positive.

   MEDSCHOOL and JCAHACCRD are dummy variables reflecting additional dimensions of hospital service quality. MEDSCHOOL reflects whether or not the hospital is affiliated with a medical school. The training and research focus associated with medical schools should enhance the quality (or at least the perceived quality) of affiliated hospitals. JCAHACCRD indicates accreditation by the Joint Commission on Accreditation of Healthcare Organizations (JCAH), and is therefore an index of hospital quality. Thus, both variables are expected to be negatively related to hospital reserve margin. Finally, PPOAFFIL is a dummy variable indicating affiliation with a preferred provider organization (PPO). PPO affiliation is expected to increase the reserve margin since hospitals must hold higher levels of reserve margins to meet the quality requirements of PPOs.

   Hospital Ownership

   Two hospital ownership dummy variables were included in this study, GOVOWN indicating public non-profit hospitals and FORPROF indicating private for-profit hospitals.(3) It is tempting to assume that for-profit hospitals, because of the profit motive, will place greater emphasis upon efficiency and cost control, resulting in smaller reserve margins. Government hospitals, on the other hand, might be expected to have higher reserve margins given their more open admissions policies and their mandate to provide backup capacity as a public institution. However, a more thorough theoretical analysis of the relationship between reserve margin and hospital ownership does not support these contentions.(4) Thus, we have no clear a priori expectations concerning the impacts of these two...