The effects of changes in cost allocations on the assessment of cost containment regulation in hospitals

Empirical studies that examine the effects of regulation on cost containment frequently ignore the impact of changes in accounting practices. This results in a potential bias of research findings. For example, some studies found evidence of cost containment for inpatient services after a change in Medicare reimbursement in 1983. However, Eldenburg and Kallapur (1997, p. 33) found that more costs were allocated to outpatients and correspondingly less to inpatients after 1983, which could bias the cost comparisons. In this paper we examine changes in inpatient costs relative to outpatient costs, after controlling for allocations, to determine whether the magnitude of allocation changes was large enough to bias the findings of studies that ignored these accounting practices. As in previous health-care studies (noted in our paper), we found that inpatient full costs (i.e., direct cost plus allocated costs) decreased relative to outpatient full costs after 1983. However, when cost allocations were excluded, inpatient direct costs increased relative to outpatient direct costs, thus providing no evidence of cost-containment. When regulation provides incentives that have the potential to affect accounting practices and public policy researchers do not consider the implications of these accounting practices, analyses of the success of public regulation may reach improper conclusions. Accordingly, subsequent policy based on such research findings may be incorrectly motivated.