Pricing of Hospital Cardiac Procedures: Impacts of Federal Quality Reports

This paper examines the price-quality traded-off associated with hospital report cards, as they become nationally available. In particular we examine the impact of Medicare’s Hospital Compare (HC) quality rankings on prices for related cardiac procedures. A previous study suggested that the initiation of HC on-line reporting in 2007 exerted competitive pressures on hospitals, thereby helping to slow the overall rate of increase in related prices (Dor, Encinosa, Carey, Health Affairs 2015).  However, the analysis did not identify quality heterogeneity among hospitals, and thus could not address concerns over markets failure, whereby higher-quality hospitals would be unduly penalized.   

To fill this gap we examine the impact of HC by the quality rankings as reported on-line. We estimated variants of DDD models that allow for varying policy based on treatment intensity (Finkelstein, QJE 2007).  States that had similar report card systems prior to the initiation of HC form the control group. We consider the effect of main HC quality scores (heart attack, heart failure, and pneumonia mortalities) separately and combined on prices of two major cardiac procedures: heart bypass surgery and angioplasty in the years 2005-2011. Using a large national claims dataset for privately insured patients allows us to identify actual payments to hospitals (transaction prices), and large patient-year samples (n=17,900 and 53,300, for bypass surgery and angioplasty respectively) from approximately 1,100 hospitals. 

We estimated the models with two different specifications: linear models using the two-step generalized method of moments (GMM) estimator and nonlinear models using generalized linear modeling (GLM), log link function with gamma distribution, controlling for patient and plan characteristics, and hospital fixed effects. We find an overall effect of HC initiation to be in the range of -16.2 to -19.1 percent for heart attack prices, but 6.3-6.9 percent for angioplasty prices. However, for the category of high quality hospitals,  there was a quality “premiums” which helped offset the general price effects almost fully. We conclude that HC was effective at leveraging competitive downward pressure on prices without penalizing high performers.