The rapid increase in outpatient expenditures has been the focus of growing attention in recent years. This increase has corresponded with public and private efforts to contain hospital inpatient costs, prompting some analysts to suggest that outpatient expenditure growth is the result of a substitution effect; that is, the substitution of outpatient for inpatient care associated with hospital cost containment programs. Claims data on 43 privately insured groups that adopted utilization review (UR) during the latter part of 1984 or early 1985 were analyzed, comparing outpatient expenditures before and after adoption of hospital inpatient UR to quantify the substitution effect associated with UR. UR was not associated with higher physician office expenditures nor with higher outpatient diagnostic expenditures. UR was related to significantly higher hospital outpatient department expenditures. On average, these expenditures were approximately 20% higher (P = 0.01) after the adoption of UR. However, outpatient department expenditures of the groups analyzed represented a fairly small percentage of total medical expenditures; hence, the absolute expenditure increase was quite modest, on the order of $9 per insured person per year. This analysis, admittedly limited in scope, suggests that UR is associated with a measurable substitution effect. It is likely that inpatient hospital cost containment programs have resulted in some substitution of outpatient for inpatient care and thus have played a role in fostering outpatient expenditure growth during recent years.
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