How Costly is Hospital Quality? A Revealed-Preference Approach

62 Pages Posted: 11 Jan 2008 Last revised: 9 Jul 2010

See all articles by John Romley

John Romley

Price School of Public Policy, University of Southern California; University of Southern California - Schaeffer Center for Health Policy and Economics

Dana P. Goldman

RAND Corporation; National Bureau of Economic Research (NBER)

Date Written: January 2008

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

Romley, John and Goldman, Dana P., How Costly is Hospital Quality? A Revealed-Preference Approach (January 2008). NBER Working Paper No. w13730. Available at SSRN: https://ssrn.com/abstract=1082749

John Romley

Price School of Public Policy, University of Southern California ( email )

USC Schaeffer Center, Verna & Peter Dauterive Hall
635 Downey Way
Los Angeles, CA CA 90089-3333
United States

University of Southern California - Schaeffer Center for Health Policy and Economics ( email )

635 Downey Way
Los Angeles, CA 90089-3333
United States

Dana P. Goldman (Contact Author)

RAND Corporation ( email )

P.O. Box 2138
Santa Monica, CA 90407-2138
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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