New evidence against healthcare exceptionalism

Chad Syverson from Chicago Booth gave a talk at Duke about his new paper “Healthcare exceptionalism? Productivity and Allocation in the U.S. Healthcare Sector” with Amitabh Chandra, Amy Finkelstein and Adam Sacarny.

This paper was motivated by the large variation in medicare costs across regions and hospitals as well as the little correlation between health outcomes and costs. The authors ask whether healthcare industry allocate resources less efficiently than other industries. They find evidence against the widely held argument that healthcare industry does not operate with standard market forces. Specifically, they find that more productive hospitals have a higher market share in the current time period and are more likely to expand.

Standard productivity models are used to estimate the TFP of hospitals and then estimate the relationship between TFP and market share. Data on heart attack treatment are used to reduce the patient sorting (because heart attack is emergent and therefore people do not have much time to shop around) and to make use of relatively well-measured inputs.

Several key issues need to be resolved for their estimation. First, estimations of production function are subject to endogeneity problems. In this case, hospitals’ choice of inputs are likely to be correlated with their productivity. This issue is addressed by identifying the coefficients on inputs only from variation within hospitals. Second, input costs across regions and hospital may be incomparable because prices are different. The authors adjust for this effect using Diagnosis Related Group (DRG) and standard estimated costs averaged across the country. Third, censoring may occur in measurement for outputs. Their main analysis has a one-month horizon. But they changed the time window (shorter and longer) to show robustness of results. They also used a Bayesian shrinkage estimation method to adjust for estimation error in hospital TFP.

Prof. Syverson sees this paper as the starting point of a series of investigations into the productivity and allocation of healthcare industry. Many other interesting topics remain to be researched on: Does hospital management or doctors have a bigger impact on the productivity? Does change in ownership affect productivity? There is much to be done to demystify this industry.

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