CEO, Blue Mountain Hospital

Dissertation Title

Fixed and Variable Costs at Critical Access Hospitals

Dissertation Abstract

Cost structures (the ratio of fixed to variable costs) vary across and within industries. Hospital managers and policymakers can make better decisions when they under-stand cost structures, including marginal costs (the change in the total cost that arises when the quantity produced is increased by one unit). Although some studies have investigated hospital cost structures, the results have been mixed and less than definitive, and very little attention has been given to critical access hospitals and marginal costs specifically.

Rural hospitals, including critical access hospitals, have increasingly experienced financial distress. Between 2005 and 2019, 159 rural hospitals closed across the United States, and at least 800 are currently considered at risk of closing because of financial pressures. These financial pressures are affected by policy and managerial decisions, both of which are better informed with an understanding of critical access hospital cost structures.

A quantitative, retrospective, longitudinal study was performed to compare inpatient volumes with inpatient costs at critical access hospitals. The purpose of the study was to establish the relationship between volume and cost, to estimate variable or margin-al costs, and to identify the fixed and variable portions of costs at critical access hospitals.

Data from a national sample of hospitals, representing operations from 2003 through 2015, was gathered from the Centers for Medicare & Medicaid Services Healthcare Cost Report Information System.

Results indicate a significant correlation between the number of patient days and total inpatient service costs at critical access hospitals. The variable cost of an inpatient day at critical access hospitals was estimated at $815.83. The variable cost ratio for inpatient services at critical access hospitals was estimated at 54%. Critical access hospitals with higher inpatient volumes were found to have lower average total costs, and lower fixed cost ratios when compared to critical access hospitals with lower inpatient volumes.

There are implications for policymakers, hospital managers, and researchers. Hospital managers and policymakers will be better informed with an understanding of variable (or marginal) costs and cost ratios. Further research is warranted.