Identifying Sources of Inefficiency in Health Care

50 Pages Posted: 20 Nov 2017

See all articles by Amitabh Chandra

Amitabh Chandra

Harvard University - Harvard Kennedy School (HKS); National Bureau of Economic Research (NBER); IZA Institute of Labor Economics

Douglas Staiger

Dartmouth College - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: November 2017

Abstract

In medicine, the reasons for variation in treatment rates across hospitals serving similar patients are not well understood. Some interpret this variation as unwarranted, and push standardization of care as a way of reducing allocative inefficiency. However, an alternative interpretation is that hospitals with greater expertise in a treatment use it more because of their comparative advantage, suggesting that standardization is misguided. We develop a simple economic model that provides an empirical framework to separate these explanations. Estimating this model with data on treatments for heart attack patients, we find evidence of substantial variation across hospitals in both allocative inefficiency and comparative advantage, with most hospitals overusing treatment in part because of incorrect beliefs about their comparative advantage. A stylized welfare-calculation suggests that eliminating allocative inefficiency would increase the total benefits from this treatment by about a third.

Suggested Citation

Chandra, Amitabh and Staiger, Douglas, Identifying Sources of Inefficiency in Health Care (November 2017). NBER Working Paper No. w24035. Available at SSRN: https://ssrn.com/abstract=3074213

Amitabh Chandra (Contact Author)

Harvard University - Harvard Kennedy School (HKS) ( email )

79 John F. Kennedy Street
Cambridge, MA 02138
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Douglas Staiger

Dartmouth College - Department of Economics ( email )

Hanover, NH 03755
United States
603-643-2979 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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