A simple objective method for determining a percent standard in mixed reimbursement systems

In a mixed system for hospital rate setting, reimbursement is set at the weighted average of provider-specific and standard unit costs. With one or more explanatory variables, forward and reverse regression is used to motivate the simple but objective choice of one minus the squared correlation coefficient as the proportion standard. Special treatment is given to nuisance variables that help explain cost but not reasonable cost. Efron's bootstrap provides confidence intervals for the proportion standard. This regression approach is contrasted with the conventional use of the coefficient of variation, and with economic models for the optimal proportion.