Risk adjustment and hospital cost-based resource allocation, with an application to El Salvador

Ignorance about the costs, case loads and case mixes of different hospitals within the public health system constitutes an important obstacle to refor ming health care spending in many developing countries. National (tertiary) hospitals generally receive significantly larger budgets, per patient, tha n lower-level (district) hospitals. One reason for these differential alloc ations is the widely held belief that national hospitals treat persons with more difficult illnesses and persons who are more severely ill than do oth er, non-national, hospitals. This belief is but a presumption and one that warrants investigation. This paper analyzes expenditures among public hospi tals in Fl Salvador over a 12-year period to address this question. While c ontrolling for patient morbidity, outputs and other characteristics, distri ct hospitals are found to be substantially underfunded relative to national hospitals. Four policy options to redress this situation are examined. (C) 1998 Published by Elsevier Science Ltd. All rights reserved.