Working Papers

Searching for the Best Yardstick: Cost of Quality Improvements in the U.S. Hospital Industry
Lim JM, Moon K, Savin S. (SSRN)

  • Winner, MSOM Student Paper Competition

  • Major revesion at Management Science

The Hospital Value-Based Purchasing (VBP) Program is Medicare's implementation of yardstick incentives applied to hospitals in the U.S. Under the VBP Program, 2% of all Medicare payments to hospitals, estimated to be US$1.9B in the fiscal year 2021, are withheld and redistributed based on their relative performance in the quality of delivered care. We develop a dynamic equilibrium model in which hospitals are engaged in repeated competition under yardstick incentives. Using structural estimation methods, we recover key parameters that govern hospitals' decisions to invest in quality improvement including the financial and non-financial costs and uncertain outcomes of investment. By dynamically solving for hospitals' individually optimal investment policies, we estimate the trajectory of quality improvements for each hospital, including its investment decisions and quality levels throughout the implementation of the VBP Program. Our counterfactual analyses explore the benefits, on the one hand, of modifying the overall size of the yardstick incentives and, on the other hand, of implementing a more focused program tailored to hospital type. We find that increasing the size of the incentives from 2% to 4% would have resulted in an additional quality investment of US$1.2B from 2011 to 2018, leading to a 3.3% reduction in the average rate of central-line associated bloodstream infections (CLABSI). Applying yardstick incentives to the tailored hospital peer groups, even without changing the size of the incentives, can lead to an average reduction of 1.4% in the rate of CLABSI among groups of hospitals associated with the highest costs of quality investment.

Spillover Effects of Capacity Pooling in Hospitals
Lim JM, Song H, Yang J. (SSRN)

  • Reject and resubmit at Management Science

Off-service placement is a common capacity pooling strategy that hospitals utilize to address mismatches in supply and demand that arise from the day-to-day variation in patient demand. This strategy involves placing patients in a bed in a unit that is designated for another specialty service. Building on prior work that documents the negative first-order effects of off-service placement on patients who are placed off service themselves, we quantify the spillover effects of this practice on patients who are actually placed on service. Using an instrumental variables approach, we find that patients placed on service experience a substantial spillover effect of off-service placement, manifesting as a longer length of stay, a higher likelihood of hospital readmission, and a higher likelihood of clinical trigger activation. Our analyses show it is not only the average level of off-service placement, but also the volatility of off-service placement, that contributes to this spillover effect. Through a series of counterfactual analyses, we propose alternate routing policies that could meaningfully improve outcomes around the efficiency and quality of care in the inpatient setting.

Work in Progress

Physician-Hospital Integration and the Effect on Hospital Quality

The American Medical Association reported that 2016 was the first year when less than half of physicians had an ownership stake in their practice. As the industry is moving towards a model of direct employment of physicians, as opposed to providing admitting privileges, this paper examines the effect of physician-hospital integration on hospital quality. In particular, the degree of physician-hospital integration is considered as a potential strategy for hospitals to respond to changes in incentive structures created by the Hospital Value-Based Purchasing (VBP) Program. An instrumental variables approach, combined with exogenous shocks created by changes in the VBP program, is used to identify the causal effect of physician-hospital integration on hospitals' ability to quickly respond to changes in incentive schemes. I find that tighter organizations, i.e., ones that hire physicians directly, are more responsive to policy changes in that they are able to improve aspects of hospital quality that are measured by the VBP program in a faster and more extensive manner.

Estimating Welfare-reducing Moral Hazard in Health Insurance: The Pure Income Effect Approach
Claudio Lucarelli

Ex-post moral hazard in health care refers to the phenomenon in which the level of health care consumption increases when consumers have health insurance plans that reduce the purchasing price of health care. While there has been convincing evidence documenting the existence of moral hazard in health care, the question of how much moral hazard is in fact welfare-reducing has been less studied. This paper exploits the private insurance market in South Korea to estimate the extent to which changes in consumer behavior caused by distortions in the price of health care can be identified as deadweight welfare loss. Using data on insurance contracts with lump-sum transfers, we estimate components of the Slutsky equation to find that around 80% of observable moral hazard is welfare-reducing.