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In the ongoing effort to control costs, comparisons among hospitals' efficiency levels, if valid, can help identify "best practices" across institutions and uncover situations that need corrective intervention. The authors present an extension of the "adjusted cost per equivalent discharge" approach, which incorporates case-mix-severity differences, regional labor cost differentials, and inpatient/outpatient mix, but does not take into account such factors as the differences in hospital sizes, extents of the teaching mission, or quality of care delivered. The alternative approach yields information that suggests where an institution's total operating costs might be reduced with no change in any of the hospital's outputs or operating environment, through comparison with a "peer group" of other hospitals, matched according to the subject hospital's number of beds, the quality of care the hospital delivers, the extent of medical education carried out, the level of case-mix-adjusted discharges, and outpatient activities. A difficulty with this approach (as with others) is that measurement of some of the additional facets (e.g., quality of care) is still evolving, so its main contribution at this time is to provide a construct and method capable of incorporating these important added considerations. Hospital rankings achieved by applying the current and alternative approaches to a real set of teaching hospitals operating in FY 1987 are compared. While the rankings produced by the two approaches are loosely similar, the authors show that some significant differences do appear and can be at least partially explained by the incorporation of the additional factors mentioned above.

The debate concerning quality of care in hospitals, its "value" and affordability, is increasingly of concern to providers, consumers, and purchasers in the United States and elsewhere. We undertook an exploratory study to estimate the impact on hospital-wide costs if quality-of-care levels were varied. To do so, we obtained costs and service output data regarding 300 U.S. hospitals, representing approximately a 5% cross section of all hospitals operating in 1983; both inpatient and outpatient services were included. The quality-of-care measure used for the exploratory analysis was the ratio of actual deaths in the hospital for the year in question to the forecasted number of deaths for the hospital; the hospital mortality forecaster had earlier (and elsewhere) been built from analyses of 6 million discharge abstracts, and took into account each hospital's actual individual admissions, including key patient descriptors for each admission. Such adjusted death rates have increasingly been used as potential indicators of quality, with recent research lending support for the viability of that linkage. The authors then utilized the economic construct of allocative efficiency relying on "best practices" concepts and peer groupings, built using the "envelopment" philosophy of Data Envelopment Analysis and Pareto efficiency. These analytical techniques estimated the efficiently delivered costs required to meet prespecified levels of quality of care. The marginal additional cost per each death deferred in 1983 was estimated to be approximately $29,000 (in 1990 dollars) for the average efficient hospital. Also, over a feasible range, a 1% increase in the level of quality of care delivered was estimated to increase hospital cost by an average of 1.34%. This estimated elasticity of quality on cost also increased with the number of beds in the hospital.

A technique is proposed that applies variance analysis to the aged trial balance to break down the total change in reserve requirement, from one balance sheet date to the next, into a volume variance, a composition variance, and a rate variance. This breakdown allows the accountant or auditor to focus on compositional changes in the trial balance that contribute to otherwise irreconcilable changes in the provision requirement. An assessment of the reasons behind these compositional changes may result in adjustments to the reservation rates or to the provision amount to help bring the asset valuation into line with the income statement adjustments to revenue.