Consistency is Key: How Costing Information Consistency Helps Hospitals Manage Costs

Abstract

Health care costs in the United States make up a larger proportion of gross domestic product (GDP) than in any other developed country and continue to rise. We examine whether the use of consistent costing information across hospitals ("costing information consistency", or CIC) provides one avenue to reduce these costs. We empirically measure CIC at the hospital level by identifying whether a given hospital's costing system vendor is the same as the primary (most prevalent) costing vendor in the hospital group to which the hospital belongs. Using M&A activity among costing system vendors as an instrument for exogenous changes in hospital CIC, we find that CIC is associated with an 18.7% reduction in operating expenses, suggesting that increased cost comparability from CIC helps hospitals identify ways to cut costs. Moreover, these cost reductions appear to be achieved without compromising the quality of care. We find no significant association between CIC and patient satisfaction, mortality, or readmission rates, and reductions in expenses as the result of CIC are concentrated in non-clinical services such as administration, medical records, and housekeeping. Based on our findings, we estimate that introducing CIC in all inconsistent U.S. hospitals could result in a 2.6% reduction in economy-wide hospital expenses, or roughly $30 billion.

Keywords: cost management, costing system, information system integration, value-based care

JEL Classification: I0, M4, M15