Examining the Impacts of Clinical Practice Variation on Operational Performance

This study explores whether and how lower variations in clinical practice relate to hospital operational performance. This relation is critical to the overall search for pathways that will allow the healthcare industry to bend the cost curve, implying significant implications for practice and regulators. We define practice variation as all variation not resulting from patient mix and construct a novel measure using inpatient discharge data for each patient cohort having an identical medical condition. Hospitals in our dataset show a broad practice variation spectrum. Using statistical process control (SPC) as a theoretical lens, we hypothesize the negative impacts of practice variation on operational performance. We also consider intervening impacts of hospital quality evaluations on the relationship. Analyzing data of six years from hospitals in NY and FL states using a dynamic panel system Generalized Method of Moments estimator, we find that higher practice variation relates to longer average patient length‐of‐stay and higher total cost per capita. This phenomenon is even stronger when a hospital provides services with higher quality in patient experience because such a hospital tends to provide more responsive care to patients, which is often resource‐intensive. By delving into granular dimensions of practice variation based on detailed charge data, we find that higher care‐delivery practice variation (i.e., the provision of healthcare) is directly associated with poor operational performance. We also find that pursuing higher quality measures may be harmful to some hospital operational performance measures as they have combined effects with the test‐ordering practice variation (i.e., detecting disease and monitoring its status). Taken together, these findings imply that careful attention to the two dimensions of practice variation and the nuanced joint relationship with quality measures may address the trade‐off between high quality and low cost, and provide room for improvement in practice, ultimately reducing waste in the healthcare industry. Our measure of practice variation also contributes since it enables researchers and managers to rigorously measure and visualize the status of hospitals’ practice variation linked to hospital operational performance.