What explains variation in the costs of treating patients in English obstetrics specialties?

We assess patients admitted to English obstetrics departments to identify what proportion of variation in their costs is explained by patient characteristics and what proportion is due to departmental characteristics. Hospital Episode Statistics records for every patient admitted to obstetrics departments are matched to Reference Cost data by HRG reported by all English hospitals for the year 2005/6. Our sample consists of 951,277 patients in 136 departments. We estimate fixed effects models analysing patient-level costs, explore departmental characteristics that drive variation in costs at department-level and explore the sensitivity of results to the use of the full sample and sub-samples of obstetrics patients. Patient costs depend on various diagnostic characteristics over and above the HRG classification, particularly whether the patient suffered infection. After controlling for patient characteristics a substantial amount of unexplained variation in costs remains at departmental level. Higher costs are evident in departments that are not supported by a neonatology specialty and where factor prices are higher. There is evidence of lower costs in departments with high volumes of activity. We identify departments where further scrutiny of their high costs is required.