| Summary: | The Critical Access Hospital (CAH) Program was created in response to the dramatic deterioration of financial conditions and the potential threat of closure of small rural hospitals under the Prospective Payment System (PPS). CAHs receive cost-based reimbursement for services provided to Medicare patients in exchange for accepting a number of restrictions. The PPS, which pays a fixed price per case, provides an incentive for hospitals to reduce costs and increase efficiency. In the first essay, I examine the impact of conversion to CAH status on hospital efficiency. The estimated results show that CAHs are less cost and allocatively efficient than non-converting, PPS rural hospitals, without being less technically efficient. Relative to their pre-conversion selves, CAHs appear to be slightly less allocatively efficient, while they are slightly more technically efficient, and no less cost efficient. The second essay examines cost efficiency differences between CAHs and non-converting, PPS rural hospitals using quality controls and alternative methods of efficiency analysis. The results show that CAHs are, on average, less cost efficient than non-converting, PPS rural hospitals. The third essay estimates the marginal effects of environmental variables on the technical efficiency of CAHs. The results suggest that enhanced Medicare reimbursement may not have had a detrimental effect on the technical efficiency of CAHs. Overall, the results of this dissertation have important policy implications. First, they show that cost-based reimbursed CAHs are, on average, between 4.5 and 6.7 percentage points less cost efficient than non-converting, PPS rural hospitals. This can be translated in a cost per CAH between $751,000 and $1.12 million (in 2005 dollars) higher than the cost that would have been under the PPS. Second, the results show that the technical efficiency of CAHs improved relative to the pre-conversion period and that CAHs are as technically efficient as non-converting, PPS rural hospitals. It may be the case that the CAH Programs requirements have resulted in technical efficiency improvements comparable to the PPS. Third, improved technical efficiency of CAHs in conjunction with their decreased cost efficiency suggest that reductions in CAHs cost efficiency may not be a function of direct overconsumption of physical inputs. Rather, decreased cost efficiency of CAHs may be driven by allocative inefficiency generated by the inability of these hospitals to substitute to lower input cost combinations in the production process.
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