Analyzing cost efficiency of Critical Access Hospitals

The Critical Access Hospital (CAH) program has been created to protect small, financially vulnerable rural hospitals in the U.S. by granting them Medicare cost‐based reimbursement. However, there have been concerns that this type of reimbursement might have a negative impact on the cost efficiency of hospitals that converted to CAH status. This study examines the impact of Medicare cost‐based reimbursement, length of participation in the CAH program and other environmental variables on the cost efficiency of CAHs using a two‐stage approach. In the first stage, data envelopment analysis is used to estimate cost efficiency of CAHs. In the second stage, cost efficiency is regressed on environmental variables using a parametric bootstrap of a truncated regression. The estimated results suggest that Medicare cost‐based reimbursement may increase the cost inefficiency of CAHs and that longer participation in the CAH program increases hospital cost inefficiency but the extent of this inefficiency increase is lower than what previous literature showed.