This article assesses the relative cost of providing a specific procedure, knee replacement (KR) surgery, to rural residents in rural community-based hospitals rather than in urban hospitals. Costs are predicted using regression analysis with readily available data from Health Care Financing Administration's Medicare Provider Analysis and Review. The specification incorporates the effect of referral patterns on volume and the subsequent impact on costs in the different settings. The predicted cost per case was found to be lower in rural rather than urban hospitals across all patient types. Findings indicate scale economies exist for KR surgery in both the urban and rural hospital settings. Results also suggest the total cost of a hospitalization associated with KR surgery in rural hospitals is more sensitive to changes in procedure volume than in urban hospitals, providing preliminary support for increased regionalization of KR surgery in rural hospitals. While longterm outcome measures associated with successful KR surgery (improved function, reduced pain, etc.,) are not available, mortality rates and perisurgical complication rates were not significantly different between rural patients who received KR surgery in rural hospitals and those who received KR surgery in urban hospitals. Among rural hospitals, however, complication rates were significantly correlated with procedure volume (complication rates were significantly lower in rural hospitals that performed more than nine KRsurgeries a year). Our results suggest KR surgery can be delivered efficiently in rural community-based settings and support the case for regionalization of this procedure.
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