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OBJECTIVE: To explore whether geographic variations in Medicare hospital utilization rates are due to differences in local hospital capacity, after controlling for socioeconomic status and disease burden, and to determine whether greater hospital capacity is associated with lower Medicare mortality rates. DATA SOURCES/STUDY SETTING: The study population: a 20 percent sample of 1989 Medicare enrollees. Measures of resources were based on a national small area analysis of 313 Hospital Referral Regions (HRR). Demographic and socioeconomic data were obtained from the 1990 U.S. Census. Measures of local disease burden were developed using Medicare claims files. STUDY DESIGN: The study was a cross-sectional analysis of the relationship between per capita measures of hospital resources in each region and hospital utilization and mortality rates among Medicare enrollees. Regression techniques were used to control for differences in sociodemographic characteristics and disease burden across areas. DATA COLLECTION/EXTRACTION METHODS: Data on the study population were obtained from Medicare enrollment (Denominator File) and hospital claims files (MedPAR) and U.S. Census files. PRINCIPAL FINDINGS: The per capita supply of hospital beds varied by more than twofold across U.S. regions. Residents of areas with more beds were up to 30 percent more likely to be hospitalized, controlling for ecologic measures of socioeconomic characteristics and disease burden. A greater proportion of the population was hospitalized at least once during the year in areas with more beds; death was also more likely to take place in an inpatient setting. All effects were consistent across racial and income groups. Residence in areas with greater levels of hospital resources was not associated with a decreased risk of death. CONCLUSIONS: Residence in areas of greater hospital capacity is associated with substantially increased use of the hospital, even after controlling for socioeconomic characteristics and illness burden. This increased use provides no detectable mortality benefit.