Hospitals with Higher Direct Cost Ratios Have Lower Readmission Rates

Abstract

Utilizing limited resources to generate the best quality of care for patients is one of the most pressing challenges faced by hospital executives. In this study, we examine how a hospital’s direct cost ratio, defined as the cost directly related to patient care divided by the total cost of patient care, is associated with an important quality metric, the Medicare 30-day unplanned readmission rate. Using the 2014 Medicare Cost Report, Hospital Compare, and Final Rule Data from the Center for Medicare & Medicaid Services (CMS), we find that one standard deviation increase in the direct cost ratio is associated with fifteen fewer readmissions per 10,000 discharges, holding total patient care cost per adjusted discharge constant. Supplementary analyses show that the direct (indirect) cost per adjusted discharge is negatively (positively) associated with readmission rates. Our study recognizes the implication of cost structure on one important measure of hospital quality of care. The results provide hospital executives with useful guidance for making budgetary decisions.