DISCUSSION

In recent years, physicians and administrators have worked tirelessly to reduce hospital stays with the understanding that LOS is a good surrogate for cost. The thinking has been that lopping 1 day off of the end of an inpatient stay reduces the overall cost by the mean cost of a day in the hospital. Unfortunately, this widely held perception is incorrect. The reason is that not all hospital days are economically equivalent. Tables 1 to 7 show a reliable rule of thumb, at least for our hospital and our trauma service: On average, the last full day of hospitalization involves incremental resource costs in the range of just $400 to $450. Cutting this day would save the hospital only a small percentage of the total cost of care.

The basic truth is that the bulk of health care expenses take the form of overhead, or they are incurred early in patients' hospital stays. This comes as no surprise to practicing physicians who recognize that the early phase of care involves expensive diagnosis and intervention, while the final days are essentially recuperative.

Yet, for four reasons, even these figures overstate the impact that reductions in LOS have on health care costs. Suppose, for example, that our trauma service set out to discharge every eligible patient on average 10% sooner than it does now. Would it save even 2% to 3% of total costs? The answer is almost certainly not. First, 44% of the service's 665 patients in fiscal year 1998 simply could not have been discharged much faster, either because they died (n = 46), they were discharged against medical advice (n = 4), or they already had stays of 3 days or less (n = 242). Second, to achieve this 10% LOS reduction, the trauma service would likely focus on patients who were relatively healthy. These likely candidates for reduced LOS are also the cheapest patients to retain in the hospital. Cutting their LOS does relatively little to reduce aggregate costs. Third, discharging patients 10% faster is not equivalent to eliminating the attendant end-of-stay costs. To accomplish the 10% LOS reduction, some treatments (eg, laboratory tests) must be accelerated and other treatments (eg, pharmaceuticals) must be continued on an outpatient basis. These costs would be shifted rather than eliminated. This is especially true when patients are discharged to other facilities or to home health care.

Fourth and finally, in this study all expenses surrounding nurses directly involved in patient care were categorized as variable direct costs. This approach presumes that staff can be adjusted quickly as patient activity ebbs and flows. This categorization is appropriate if the hospital uses substantial amounts of nursing overtime (which is the case at the University of Michigan) or if there is considerable nursing turnover. But if nurses are salaried or if the time horizon for decision making is very short (meaning that the hospital is committed to its staffing levels), then it may be more appropriate to treat nursing as a fixed cost.8 Because nursing represents the majority of end-of-stay costs, shifting even a portion of these expenditures out of the category of variable direct costs would have a profound impact on the results reported here.

Our analysis raises the following question: Does LOS truly matter? Although our university hospital has a tertiary referral-based population, we strongly believe that our results generalize to most hospital settings. Within most hospitals and health systems, most costs take the form of overhead charges, and the preponderance of variable costs are incurred very early in patients' hospital stays. Put differently, our results would not generalize only if our higher costs of care stem strictly from significantly greater overhead rather than higher costs across the board, or if we are unique among hospitals in paring end-of-stay variable direct costs. We have no reason to suspect that this is the case.

It is important to note that this analysis presumes that the hospital has excess capacity, so that retaining any given patient in the hospital does not preclude admitting other patients. Hospitals facing capacity constraints encounter what economists call "opportunity costs,'' meaning that those hospitals would have to forgo the opportunity to care for new patients to keep existing patients in house longer. In the event of such capacity constraints, hospitals should explicitly factor in these opportunity costs. From a revenue perspective, when the health system is at capacity, it is more effective to take in new "high-revenue'' admissions by discharging "low-revenue'' patients who are in the convalescent phase of their recovery. If there are capacity constraints, the case for reducing LOS may become much more compelling, both financially and medically. One important limitation of this study is that it does not explicitly factor opportunity costs (which are notoriously difficult to measure) into the analysis.

Our analysis also depends upon the accuracy and integrity of the University of Michigan's cost-accounting system, and this is the most important limitation of the study. The most immediate concern involves the categorization of costs into the variable direct category. Whenever costs are difficult to allocate to individual patients, hospitals (like other businesses) must count them instead as overhead, even though they might actually vary directly with patient activity. Hospital finance has identified for us the three activities where expenses are allocated to the indirect-cost component even though they arguably belong in the category of variable direct costs: dietetic services ($5.7 million total cost in fiscal year 1998), housecleaning ($8.9 million), and transcription ($11.2 million). These costs are substantial, but they are not an especially large percentage (8.6%) of the $301 million in total costs of running the hospital. More important, none of these activities is likely to involve much in terms of end-of-stay costs. Finally, we believe that the University of Michigan is as aggressive as any hospital in the country in tagging costs to individual patients (which readers can confirm by asking their own administrators whether they include dietetic services, housecleaning, and transcription in their variable direct costs). As such, replicating this study at other institutions would likely yield results that, if anything, are starker than those reported here. In short, we have confidence in our hospital finance department and the accounting mechanisms they have in place.

It is also important to remain aware that from the payers' perspective, the savings from a reduced LOS depend upon that payer's contractual relationship with the health system. In a fixed-fee reimbursement system, the payer has no strong financial stake in a patient's LOS. In a traditional fee-for-service system, however, reimbursement is a function of charges, which typically involve a markup over total costs. The implication is that the payers' savings from reducing LOS by 1 day could amount to $1,000 or more. In short, although the incremental resource cost of retaining a typical patient for 1 additional day is $400 to $450, fee-for-service payers may reimburse several times this amount.7 They are understandably eager for hospitals to discharge patients quickly.

Historically, LOS may have been a relatively simple and useful surrogate for costs. It was easily obtainable, difficult to manipulate, and directly comparable across institutions. Few hospitals had accounting systems that allowed them to monitor their actual costs, and although physicians had little control over overhead and saw little or no professional incentive to pursue what are typically perceived as administrative activities, they could work successfully to reduce LOS. One way to interpret this study's results is that the success of these endeavors has left little room for further economically significant reductions in LOS. Much of the return has been achieved. Focusing substantial physician effort on further reductions in hospital LOS will yield little value.

If LOS is no longer a source of additional cost reductions, where should physicians focus their efforts? It is critical that physicians play more active roles in two key areas. First, they must work with hospital administrators to make better use of hospital capacity and overhead, which account for the majority of the inpatient hospital costs. Such efforts must include some combination of capacity reductions; optimal use of existing capacity; and a shift in patient activities, whenever possible, to off-peak periods when beds, operating rooms, and other key facilities have historically sat idle. These efforts should also include physician participation in efforts toward networking, including building better relationships with referring physicians at other institutions. Recruiting new patients can help to control costs by enabling hospitals to amortize their overhead over a larger population. Second, physicians must work to reduce costs in the early stages of their patients' care. Costs disproportionately arise early rather than late in any given hospital stay, and measures that curtail these costs will have economically important effects.

For their part, hospital administrators must keep their physicians well informed and provide them with incentives, including professional rewards, to encourage them to participate in these activities. Together, physicians and administrators must optimize health system strategy, operations management, payer contract negotiations, and health system finance.

JACS