American policymakers and patients across the political spectrum generally agree that rising health care prices are a concern, but the question of how to bring them down has sparked contentious, mainstream debates. Some advocate expanding the government’s public health care option — often referred to as the acronym “Medicare for All” — which would pay hospitals and other providers far less for most services than private insurers currently do. Others called on the government to immediately regulate health care prices.
While lower prices sound attractive to consumers, Kellogg professors Amanda Stark and Craig Garthwaite wondered what the domino effects of legislating major changes to health care markets could be. In a new paper, co-authored with Christopher Ody, a former assistant professor of strategy at Kellogg, they focus on one question in particular: Will regulating hospital prices in an effort to lower them affect the quality of services these critical organizations provide?
“The rise in health care costs is definitely something we want to think about,” says Starc, an associate professor of strategy. “But from a consumer perspective, quality is obviously also very important. If we change the financial incentives of hospitals, we want to think about how they will respond along the dimensions of quality.”
The researchers reasoned that hospitals with a greater ability to attract high-paying, privately insured patients would provide demonstrably higher quality services than those whose patient bases were largely publicly insured and therefore paid less for those services. The reason for this, they believed: hospitals with higher-paying patients made more investments in quality as a way to differentiate themselves—and ensure their indispensability in private insurance networks.
The researchers’ findings indicate that their theories were based on money. The team looked at the demographics of zip codes near hospitals, which allowed them to estimate the share of privately and publicly insured patients the hospital could potentially attract. This helped them calculate the possible prices a particular hospital could charge for its services. The team then looked for a relationship between these potential values and various measures of hospital quality. Importantly, while investments in quality would improve care for all patients, they would only lead to higher prices for the privately insured.
The result was a consistent pattern: across all quality measures, higher scores were associated with a higher share of potential private patients. In addition, the researchers found evidence that hospitals hoping to attract more private patients make costly investments in quality.
“This becomes an important contribution to the conversation I think we’ll have after the pandemic ends about health care reform,” says Garthwaite, professor of strategy and director of Healthcare at Kellogg. “We don’t want to continue to have this easy argument that high prices are high just because hospitals are getting extra profits that they shouldn’t be – as opposed to recognizing that hospitals are making investments to attract patients. These two interpretations have very different implications for what might happen in response to the widespread use of price regulation.’
The cost of receiving high-quality care
First, researchers had to find a way to capture the relative pricing power of hospitals’ potential customer bases. They did this by analyzing ZIP code-level demographic data from the American Community Survey and the 2010 Census, then using a proximity-based formula to predict the share of a hospital’s patients that come from each ZIP code.
To quantify the actual quality of a particular hospital, the researchers created six quality measures:
- A Hospital Compare composite rating, which has resulted from government administration Website which offers several types of data points on how hospitals stack up.
- A measure that recorded emergency department wait times, which also came from government data.
- A measure based on data from the American Hospital Association’s annual survey that measures technology adoption related to birth, cardiology, diagnostic imaging, radiation therapy, and transplantation.
- A measure based on data from the 2011 Medicare Hospital Service Area Record to see which hospitals were most preferred by Medicare patients who do not face network restrictions.
- A hospital’s percentage of cardiologists who had graduated from medical school ranked in the top 25 of the 2018 US News and World Report.
- “AMI Survival per real resource” (described in another paper by the researchers who developed it), which aims to capture productivity by dividing patient health outcomes by the resources devoted to them.
By using so many different measures, the researchers tried to rule out the possibility that their results were inadvertently capturing a relationship other than the one they were trying to explore. In other words, it’s highly unlikely that hospitals that are generally considered “low quality” by the researchers’ measures are simply those with sicker patients, for example.
“We look at a wide range of quality measures, some of which are outcome dependent and some of which are not,” explains Starc. “For example, we look at risk-adjusted mortality for heart attack and we also look at technology adoption. In the latter case, the type of patient doesn’t matter – it’s just whether you invested in that fancy machine or not.”
The researchers’ results confirmed their hypothesis even more consistently than they expected: Hospitals with higher rates of potential private patients consistently demonstrated higher quality across all measures. And the reverse was also true for hospitals that primarily attracted publicly insured patients. The researchers estimated that for every standard deviation increase in a hospital’s predicted proportion of patients, mortality increased by 1.5%.
“So what we’re seeing is that the places that have more opportunity to make money from quality are making costly investments in quality,” says Garthwaite.
To help verify that this increased quality was due to investment, the team then dug into hospital accounting margins, as documented in the Medicare Hospital Cost Reports. They derived two measures from the reports: a Medicare margin, which captured a hospital’s Medicare fee-for-service business, and a non-Medicare margin, which captured all other business.
They hypothesized that hospitals whose expected patients were largely privately insured would have both smaller Medicare accounting margins—since the cost of providing care would be higher for hospitals that had made large investments in quality—and higher prices paid by private payers. – which helped offset the costs of hospital investments. While prices may vary depending on a patient’s type of insurance, hospitals were required to provide the same quality of care regardless. to the quality of their offers.
A trade-off issue
Garthwaite says he and his colleagues chose to tackle this particular project because they believe it’s important to be clear about the potential effects of legislation that will transform health care markets.
“I don’t think the paper says we shouldn’t have ‘Medicare for all,'” he says. “But it does suggest that as part of the price-regulated debate, we should be talking about that quality trade-off more than I think is happening right now in the policy debate.”
A natural question follows: How would hospitals change—and what quality tradeoffs might they make—if legislation to regulate prices or significantly expand Medicare were enacted?
“It’s very difficult to answer questions like, ‘What are they going to cut first?’ or “How big is the quality score?” says Starc. “I don’t think we know. I think we get a sense from this paper that, directionally, it is not zero. If you turn off those incentives to invest in quality, there will be some change.”
