Insignificant Correlation between Hospital Price and Quality

October 2, 2013

It is often assumed that higher performing hospitals are able to command higher prices. To test this hypothesis, a group of researchers have constructed a working paper recently released by the National Bureau of Economic Research.

  • First, they examine the distribution of prices in the private segment of the market.
  • Second, they assess the association between hospital performance and prices using a mortality-based outcome measure similar to that found in hospital report cards such as Hospital Compare.

The researchers focus on the example of colorectal cancer, and the inpatient surgical procedure associated with it, colon resection. In the United States, colorectal cancer accounts for approximately 147,000 cases and almost 50,000 deaths annually, making it the second leading cause of death among all cancers, following lung cancer.

The findings of the study were consistently negative in all models (meaning adverse quality reduces price), though not significant. However, the researchers observed a rational pricing structure whereby higher treatment complexity is reflected in higher price differentials.

  • One possible explanation for this insignificant effect is that purchasers are not able to replicate quality scores for purposes of price negotiations.
  • Another explanation is that such scores are accessible, but underlying demand for cancer treatment is not highly sensitive to quality differences among providers.

Source: Avi Dor et al, "Impact of Mortality-Based Performance Measures on Hospital Pricing: The Case of Colon Cancer Surgeries," National Bureau of Economic Research, September 2013.

 

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