IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/13730.html
   My bibliography  Save this paper

How Costly Is Hospital Quality? A Revealed-Preference Approach

Author

Listed:
  • John A. Romley
  • Dana Goldman

Abstract

One of the most important and vexing issues in health care concerns the cost to improve quality. Unfortunately, quality is difficult to measure and potentially confounded with productivity. Rather than relying on clinical or process measures, we infer quality at hospitals in greater Los Angeles from the revealed preference of pneumonia patients. We then decompose the joint contribution of quality and unobserved productivity to hospital costs, relying on heterogeneous tastes among patients for plausibly exogenous quality variation. We find that more productive hospitals provide higher quality, demonstrating that the cost of quality improvement is substantially understated by methods that do not take into account productivity differences. After accounting for these differences, we find that a quality improvement from the 25th percentile to the 75th percentile would increase costs at the average hospital by nearly fifty percent. Improvements in traditional metrics of hospital quality such as risk-adjusted mortality are more modest, indicating that other factors such as amenities are an important driver of both hospital costs and patient choices.

Suggested Citation

  • John A. Romley & Dana Goldman, 2008. "How Costly Is Hospital Quality? A Revealed-Preference Approach," NBER Working Papers 13730, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:13730
    Note: HC
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w13730.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Burns, Lawton R. & Wholey, Douglas R., 1992. "The impact of physician characteristics in conditional choice models for hospital care," Journal of Health Economics, Elsevier, vol. 11(1), pages 43-62, May.
    2. Christensen, Laurits R & Jorgenson, Dale W & Lau, Lawrence J, 1973. "Transcendental Logarithmic Production Frontiers," The Review of Economics and Statistics, MIT Press, vol. 55(1), pages 28-45, February.
    3. Hausman, Jerry, 2015. "Specification tests in econometrics," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 38(2), pages 112-134.
    4. Daniel P. Kessler & Mark B. McClellan, 2000. "Is Hospital Competition Socially Wasteful?," The Quarterly Journal of Economics, Oxford University Press, vol. 115(2), pages 577-615.
    5. Daniel A. Ackerberg & Matilde P. Machado & Michael H. Riordan, 2006. "Benchmarking For Productivity Improvement: A Health-Care Application ," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(1), pages 161-201, February.
    6. Sullivan, Daniel, 1989. "Monopsony Power in the Market for Nurses," Journal of Law and Economics, University of Chicago Press, vol. 32(2), pages 135-178, October.
    7. Lave, Judith R & Lave, Lester B, 1970. "Hospital Cost Functions," American Economic Review, American Economic Association, vol. 60(3), pages 379-395, June.
    8. Gaynor, Martin & Vogt, William B, 2003. "Competition among Hospitals," RAND Journal of Economics, The RAND Corporation, vol. 34(4), pages 764-785, Winter.
    9. Harris, Katherine M. & Keane, Michael P., 1998. "A model of health plan choice:: Inferring preferences and perceptions from a combination of revealed preference and attitudinal data," Journal of Econometrics, Elsevier, vol. 89(1-2), pages 131-157, November.
    10. Murphy, Kevin M & Topel, Robert H, 2002. "Estimation and Inference in Two-Step Econometric Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 88-97, January.
    11. David Cutler & Mark McClellan & Joseph Newhouse, 1998. "The Costs and Benefits of Intensive Treatment for Cardiovascular Disease," NBER Working Papers 6514, National Bureau of Economic Research, Inc.
    12. 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.
    13. Hendricks, Ann M., 1989. "Hospital wage gradients within U.S. urban areas," Journal of Health Economics, Elsevier, vol. 8(2), pages 233-246, June.
    14. Harris, Katherine & Schultz, Jennifer & Feldman, Roger, 2002. "Measuring consumer perceptions of quality differences among competing health benefit plans," Journal of Health Economics, Elsevier, vol. 21(1), pages 1-17, January.
    15. Dor, Avi & Farley, Dean E., 1996. "Payment source and the cost of hospital care: Evidence from a multiproduct cost function with multiple payers," Journal of Health Economics, Elsevier, vol. 15(1), pages 1-21, February.
    16. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-890, July.
    17. Martin Gaynor & Harald Seider & William B. Vogt, 2005. "The Volume–Outcome Effect, Scale Economies, and Learning-by-Doing," American Economic Review, American Economic Association, vol. 95(2), pages 243-247, May.
    18. Lakdawalla, Darius & Philipson, Tomas, 2006. "The nonprofit sector and industry performance," Journal of Public Economics, Elsevier, vol. 90(8-9), pages 1681-1698, September.
    19. Newhouse, Joseph P., 1994. "Frontier estimation: How useful a tool for health economics?," Journal of Health Economics, Elsevier, vol. 13(3), pages 317-322, October.
    20. Johannes Van Biesebroeck, 2007. "Robustness Of Productivity Estimates," Journal of Industrial Economics, Wiley Blackwell, vol. 55(3), pages 529-569, September.
    21. John Geweke & Gautam Gowrisankaran & Robert J. Town, 2003. "Bayesian Inference for Hospital Quality in a Selection Model," Econometrica, Econometric Society, vol. 71(4), pages 1215-1238, July.
    22. Gabriel A. Picone & Frank A. Sloan & Shin-Yi Chou & Donald H. Taylor, 2003. "Does Higher Hospital Cost Imply Higher Quality of Care?," The Review of Economics and Statistics, MIT Press, vol. 85(1), pages 51-62, February.
    23. McClellan, Mark & Newhouse, Joseph P., 1997. "The marginal cost-effectiveness of medical technology: A panel instrumental-variables approach," Journal of Econometrics, Elsevier, vol. 77(1), pages 39-64, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Nils Gutacker & Chris Bojke & Silvio Daidone & Nancy J. Devlin & David Parkin & Andrew Street, 2013. "Truly Inefficient Or Providing Better Quality Of Care? Analysing The Relationship Between Risk‐Adjusted Hospital Costs And Patients' Health Outcomes," Health Economics, John Wiley & Sons, Ltd., vol. 22(8), pages 931-947, August.
    2. Dana Goldman & John A. Romley, 2008. "Hospitals As Hotels: The Role of Patient Amenities in Hospital Demand," NBER Working Papers 14619, National Bureau of Economic Research, Inc.
    3. S. Balia & R. Brau & D. Moro, 2018. "Hospital choice with high long-distance mobility," Working Paper CRENoS 201810, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.
    4. K. John McConnell & Richard C. Lindrooth & Douglas R. Wholey & Thomas M. Maddox & Nick Bloom, 2016. "Modern Management Practices and Hospital Admissions," Health Economics, John Wiley & Sons, Ltd., vol. 25(4), pages 470-485, April.
    5. Zeynep Or & Thomas Renaud & Laure Com-Ruelle, 2009. "One price for all? Sources of cost variations between public and private hospitals," Working Papers DT25, IRDES institut for research and information in health economics, revised May 2009.
    6. Saghafian, Soroush & Hopp, Wallace J., 2017. "Can Public Reporting Cure Healthcare? The Role of Quality Transparency in Improving Patient-Provider Alignment," Working Paper Series rwp17-044, Harvard University, John F. Kennedy School of Government.
    7. John A. Romley & Neeraj Sood, 2013. "Identifying the Health Production Function: The Case of Hospitals," NBER Working Papers 19490, National Bureau of Economic Research, Inc.
    8. Soroush Saghafian & Wallace J. Hopp, 2020. "Can Public Reporting Cure Healthcare? The Role of Quality Transparency in Improving Patient–Provider Alignment," Operations Research, INFORMS, vol. 68(1), pages 71-92, January.
    9. Baker, Laurence C. & Bundorf, M. Kate & Kessler, Daniel P., 2016. "The effect of hospital/physician integration on hospital choice," Journal of Health Economics, Elsevier, vol. 50(C), pages 1-8.
    10. Laurence C. Baker & M. Kate Bundorf & Daniel P. Kessler, 2015. "The Effect of Hospital/Physician Integration on Hospital Choice," NBER Working Papers 21497, National Bureau of Economic Research, Inc.
    11. Andrew Sfekas, 2019. "Quality Competition and Intra-System Substitution in the Hospital Industry," American Journal of Health Economics, MIT Press, vol. 5(1), pages 65-96, Winter.
    12. Balia, Silvia & Brau, Rinaldo & Moro, Daniela, 2020. "Choice of hospital and long-distances: Evidence from Italy," Regional Science and Urban Economics, Elsevier, vol. 81(C).
    13. Howley, Peter, 2017. "Less money or better health? Evaluating individual’s willingness to make trade-offs using life satisfaction data," Journal of Economic Behavior & Organization, Elsevier, vol. 135(C), pages 53-65.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Dana Goldman & John A. Romley, 2008. "Hospitals As Hotels: The Role of Patient Amenities in Hospital Demand," NBER Working Papers 14619, National Bureau of Economic Research, Inc.
    2. Gaynor, Martin & Town, Robert J., 2011. "Competition in Health Care Markets," Handbook of Health Economics, in: Mark V. Pauly & Thomas G. Mcguire & Pedro P. Barros (ed.), Handbook of Health Economics, volume 2, chapter 0, pages 499-637, Elsevier.
    3. Laurie Rachet-Jacquet & Nils Gutacker & Luigi Siciliani, 2019. "The causal effect of hospital volume on health gains from hip replacement surgery," Working Papers 168cherp, Centre for Health Economics, University of York.
    4. Martin Gaynor & Kate Ho & Robert J. Town, 2015. "The Industrial Organization of Health-Care Markets," Journal of Economic Literature, American Economic Association, vol. 53(2), pages 235-284, June.
    5. Kurt R. Brekke & Luigi Siciliani & Odd Rune Straume, 2013. "Hospital Mergers: A Spatial Competition Approach," NIPE Working Papers 04/2013, NIPE - Universidade do Minho.
    6. Suhui Li & Avi Dor, 2013. "How Do Hospitals Respond to Market Entry? Evidence from A Deregulated Market for Cardiac Revascularization," NBER Working Papers 18926, National Bureau of Economic Research, Inc.
    7. Herr, A. & Saric, A., 2016. "The Welfare Effects of Single Rooms in German Nursing Homes: A Structural Approach," Health, Econometrics and Data Group (HEDG) Working Papers 16/23, HEDG, c/o Department of Economics, University of York.
    8. Kate Ho & Ariel Pakes, 2014. "Hospital Choices, Hospital Prices, and Financial Incentives to Physicians," American Economic Review, American Economic Association, vol. 104(12), pages 3841-3884, December.
    9. Giuseppe Moscelli & Hugh Gravelle & Luigi Siciliani, 2016. "Market structure, patient choice and hospital quality for elective patients," Working Papers 139cherp, Centre for Health Economics, University of York.
    10. Zack Cooper & Stuart V Craig & Martin Gaynor & John Van Reenen, 2019. "The Price Ain’t Right? Hospital Prices and Health Spending on the Privately Insured," The Quarterly Journal of Economics, Oxford University Press, vol. 134(1), pages 51-107.
    11. Gowrisankaran, Gautam & Town, Robert J., 1999. "Estimating the quality of care in hospitals using instrumental variables," Journal of Health Economics, Elsevier, vol. 18(6), pages 747-767, December.
    12. John Geweke & Gautam Gowrisankaran & Robert J. Town, 2003. "Bayesian Inference for Hospital Quality in a Selection Model," Econometrica, Econometric Society, vol. 71(4), pages 1215-1238, July.
    13. Giuseppe Moscelli & Hugh Gravelle & Luigi Siciliani, 2018. "Effects of Market Structure and Patient Choice on Hospital Quality for Planned Patients," School of Economics Discussion Papers 1118, School of Economics, University of Surrey.
    14. Kurt R. Brekke & Luigi Siciliani & Odd Rune Straume, 2017. "Hospital Mergers with Regulated Prices," Scandinavian Journal of Economics, Wiley Blackwell, vol. 119(3), pages 597-627, July.
    15. Gautam Gowrisankaran & Aviv Nevo & Robert Town, 2015. "Mergers When Prices Are Negotiated: Evidence from the Hospital Industry," American Economic Review, American Economic Association, vol. 105(1), pages 172-203, January.
    16. Juan M. Contreras & Elena Patel & Ignez Tristao, 2013. "Production Factors, Productivity Dynamics and Quality Gains as Determinants of Healthcare Spending Growth in U.S. Hospitals," Working Papers 2013-13, Banco de México.
    17. MORIKAWA Masayuki, 2010. "Economies of Scale and Hospital Productivity: An empirical analysis of medical area level panel data," Discussion papers 10050, Research Institute of Economy, Trade and Industry (RIETI).
    18. Nils Gutacker & Chris Bojke & Silvio Daidone & Nancy J. Devlin & David Parkin & Andrew Street, 2013. "Truly Inefficient Or Providing Better Quality Of Care? Analysing The Relationship Between Risk‐Adjusted Hospital Costs And Patients' Health Outcomes," Health Economics, John Wiley & Sons, Ltd., vol. 22(8), pages 931-947, August.
    19. Tongil “TI” Kim & Diwas KC, 2020. "The Impact of Hospital Advertising on Patient Demand and Health Outcomes," Marketing Science, INFORMS, vol. 39(3), pages 612-635, May.
    20. Zhao, Xin, 2016. "Competition, information, and quality: Evidence from nursing homes," Journal of Health Economics, Elsevier, vol. 49(C), pages 136-152.

    More about this item

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:13730. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.