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On measuring the hospital cost|quality trade-off


  • Kathleen Carey

    (US Department of Veterans Affairs Management Science Group, Bedford, MA, USA)

  • James F. Burgess

    (US Department of Veterans Affairs Management Science Group, Bedford, MA, USA)


This paper explores the relationship between cost and quality of hospital care. A total operating cost function is estimated for 137 US Department of Veterans Affairs hospitals for 1988-1993 using three rate-based measures of quality as regressors. The high likelihood of the existence of measurement error in quality in the cross section leads to the application of novel instrumental variable techniques. Results suggest that mortality and readmission indices are adjusted inadequately for illness severity. The measure on the failure to follow up inpatient discharges with outpatient care, however, appears to increase cost. The results of this paper underscore a number of practical difficulties and challenges facing government or other systems in evaluating the relative performance of their hospitals. Copyright © 1999 John Wiley & Sons, Ltd.

Suggested Citation

  • Kathleen Carey & James F. Burgess, 1999. "On measuring the hospital cost|quality trade-off," Health Economics, John Wiley & Sons, Ltd., vol. 8(6), pages 509-520.
  • Handle: RePEc:wly:hlthec:v:8:y:1999:i:6:p:509-520 DOI: 10.1002/(SICI)1099-1050(199909)8:6<509::AID-HEC460>3.0.CO;2-0

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    References listed on IDEAS

    1. Griliches, Zvi & Hausman, Jerry A., 1986. "Errors in variables in panel data," Journal of Econometrics, Elsevier, vol. 31(1), pages 93-118, February.
    2. Grannemann, Thomas W. & Brown, Randall S. & Pauly, Mark V., 1986. "Estimating hospital costs : A multiple-output analysis," Journal of Health Economics, Elsevier, vol. 5(2), pages 107-127, June.
    3. Gertler, Paul J & Waldman, Donald M, 1992. "Quality-Adjusted Cost Functions and Policy Evaluation in the Nursing Home Industry," Journal of Political Economy, University of Chicago Press, vol. 100(6), pages 1232-1256, December.
    4. Vita, Michael G., 1990. "Exploring hospital production relationships with flexible functional forms," Journal of Health Economics, Elsevier, vol. 9(1), pages 1-21, June.
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    Cited by:

    1. Lukas Kwietniewski & Mareike Heimeshoff & Jonas Schreyögg, 2017. "Estimation of a physician practice cost function," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 18(4), pages 481-494, May.
    2. Paolo Berta & Gianmaria Martini & Francesco Moscone & Giorgio Vittadini, 2016. "The association between asymmetric information, hospital competition and quality of healthcare: evidence from Italy," Journal of the Royal Statistical Society Series A, Royal Statistical Society, vol. 179(4), pages 907-926, October.
    3. repec:eee:soceps:v:60:y:2017:i:c:p:15-23 is not listed on IDEAS
    4. repec:kap:hcarem:v:20:y:2017:i:2:d:10.1007_s10729-015-9349-8 is not listed on IDEAS
    5. Martini, Gianmaria & Berta, Paolo & Mullahy, John & Vittadini, Giorgio, 2014. "The effectiveness–efficiency trade-off in health care: The case of hospitals in Lombardy, Italy," Regional Science and Urban Economics, Elsevier, vol. 49(C), pages 217-231.
    6. Anne Hvenegaard & Jacob Arendt & Andrew Street & Dorte Gyrd-Hansen, 2011. "Exploring the relationship between costs and quality: Does the joint evaluation of costs and quality alter the ranking of Danish hospital departments?," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 12(6), pages 541-551, December.
    7. Juha Laine & Miika Linna & Unto Häkkinen & Anja Noro, 2005. "Measuring the productive efficiency and clinical quality of institutional long-term care for the elderly," Health Economics, John Wiley & Sons, Ltd., vol. 14(3), pages 245-256.
    8. Suthathip Yaisawarng & James F. Burgess, 2006. "Performance-based budgeting in the public sector: an illustration from the VA health care system," Health Economics, John Wiley & Sons, Ltd., vol. 15(3), pages 295-310.
    9. Mehdi Farsi & Geert Ridder, 2006. "Estimating the out-of-hospital mortality rate using patient discharge data," Health Economics, John Wiley & Sons, Ltd., vol. 15(9), pages 983-995.
    10. Niccie L. McKay & Mary E. Deily, 2008. "Cost inefficiency and hospital health outcomes," Health Economics, John Wiley & Sons, Ltd., vol. 17(7), pages 833-848.
    11. Charles Hegji, 2006. "Correlates of hospital quality: a preliminary study," Economics Bulletin, AccessEcon, vol. 9(4), pages 1-13.
    12. Lindlbauer, Ivonne & Schreyögg, Jonas & Winter, Vera, 2016. "Changes in technical efficiency after quality management certification: A DEA approach using difference-in-difference estimation with genetic matching in the hospital industry," European Journal of Operational Research, Elsevier, vol. 250(3), pages 1026-1036.
    13. Mary E. Deily & Niccie L. McKay, 2006. "Cost inefficiency and mortality rates in Florida hospitals," Health Economics, John Wiley & Sons, Ltd., vol. 15(4), pages 419-431.
    14. Cohen, Jeffrey P. & Osleeb, Jeffrey P. & Yang, Ke, 2014. "Semi-parametric regression models and economies of scale in the presence of an endogenous variable," Regional Science and Urban Economics, Elsevier, vol. 49(C), pages 252-261.

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