Identifying Sources of Inefficiency in Health Care

by Amitabh Chandra and Douglas O. Staiger

Overview — This economic study finds evidence of allocative inefficiency and substantial variation in comparative advantage across hospitals, with the benefits from treatment being much higher in some hospitals than others. The study overall suggests new directions for research on productivity in healthcare.

Author 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.