Due to competition and managed care, hospitals have argued that the rate of increase in hospital cost is greater than the rate of increase in hospital revenue. It is important to pay hospitals based on the expected resource use of patients that hospitals treat. However, managed care organizations pay hospitals based on negotiated prices that do not consider the expected resource use of patients. The purpose of this paper is to provide a better understanding of those factors affecting hospital cost and revenue in California using the hospital financial and utilization data for selected years from 1986 to 1998. By developing case mix indexes (CMIs) using all hospital discharges in California, this study found that the coefficients for CMIs in total and inpatient hospital revenue models were greater than those in hospital cost models. Over time, however, the differences in coefficients for CMIs in hospital revenue and cost models become smaller and smaller. Thus, this study shows that the difference between hospital revenues and hospital costs, looking at hospital case mix, has decreased, although hospital revenues are still greater than hospital costs.
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