Baserate benchmarking of hospitals: A case for robust cost-bene¯t analysis

At present Germany experiences a shake-up of the hospital indus-try, following the introduction of a DRG-based hospital budgeting sys-tem. Hospital owners re-evaluate their assets and adapt their strate-gies to the new regulatory environment. Benchmarking studies play a vital role in assessing own hospitals as well as potential cooperation partners or acquisition targets. Key indicators in such studies are hos-pital baserates, which re°ect case-mix adjusted costs per case in the respective hospitals. The case-mix adjustment is based on published DRG weights which determine the pay-per-case. Setting these weights is a di±cult and lengthy political process and weights are likely to be volatile during the early phase of the new budgeting system, when the majority of strategic activity occurs. The derived baserates are therefore only snapshots and provide limited information about fu-ture pro¯tability of hospitals. To rectify this shortcoming, we suggest a robust benchmarking methodology which recognises weight volatil-ity explicitly. We apply the methodology to two groups of hospitals in Germany, a homogeneous nation-wide group of 18 maximal care units and a more heterogeneous group of all hospitals in a federal state. Managerial and policy implications are discussed. The methodology is presented in the general framework of a ratio-based cost-bene¯t analysis, which makes it applicable to a wide range of public sector benchmarking studies