Unbiased Analysis of Today's Healthcare Issues

Does more spending improve quality?

Written By: Jason Shafrin - Nov• 11•14

In most goods and services you buy, the answer is yes.  A Tesla is more expensive than a KIA; a large house is more expensive than a big house; a night at the Ritz Carlton is more expensive than a night at the Motel 6.

Nevertheless, in healthcare, many policy wonks believe that cost and quality may not be tightly related.  One reasons is that many prices (e.g., Medicare reimbursement rates) are set administratively and thus high quality providers often cannot charge higher cost.  In addition, patient are limited in their ability to observe quality of care, both before purchasing the service as well as afterwards.

A paper by Dowd et al. (2014) uses Data Envelopment Analysis (DEA) to create an aggregate measure of value that combines cost and quality.  They find that more cost-effective physician practices–as measured by DEA input efficiency scores–have lower levels avoidable or unncessary utilization of health care services.  However, the authors also find that “rates of preventive screening and monitoring of chronically ill beneficiaries increase with efficiency.”

Does this mean that physician practices should just provide as few services as possible?  Likely no.

This finding could be the result of many factors.  First, low-cost providers may have significant value in signaling to the market that they are high quality. Thus, low-cost quality initiatives–such as cancer screenings–may help improve their market share at little additional cost.  High-quality/high-cost providers may have little value focusing on broad, population-level quality metrics and may instead focus on specialized, high-quality care.  Second, the firms who are low cost may be part of accountable care organizations (ACOs).  ACOs typically receive bonuses for reducing patient cost and improving quality.

In summary, finding that “efficient” providers are low cost does not mean that reducing reimbursement rates or performing fewer services will lead to better patient outcomes.


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