Abstract
A preliminary model is developed for estimating the extent of savings, if any, likely to result from discontinuing a specific inpatient service. By examining the sources of referral to the discontinued service, the model estimates potential demand and how cases will be redistributed among remaining hospitals. This redistribution determines average cost per day in hospitals that receive these cases, relative to average cost per day of the discontinued service. The outflow rate, which measures the proportion of cases not absorbed in other acute care hospitals, is estimated as 30 percent for the average discontinuation. The marginal cost ratio, which relates marginal costs of cases absorbed in surrounding hospitals to the average costs in those hospitals, is estimated as 87 percent in the base case. The model was applied to the discontinuation of all inpatient services in the 75-bed Chelsea Memorial Hospital, near Boston, Massachusetts, using 1976 data. As the precise value of key parameters is uncertain, sensitivity analysis was used to explore a range of values. The most likely result is a small increase ($120,000) in the area's annual inpatient hospital costs, because many patients are referred to more costly teaching hospitals. A similar situation may arise with other urban closures. For service discontinuations to generate savings, recipient hospitals must be low in costs, the outflow rate must be large, and the marginal cost ratio must be low.