Estimating the Causal Relationship between Hospital Costs and Quality Measures

This paper evaluates the relationship between hospital cost and quality. The Department of Health and Human Services collects quality information from hospitals and produces a number of quality measures that are publicly available through its Hospital Compare project. The purpose of providing these quality measures is to increase transparency and accountability in the healthcare system. Another area where these quality measures could be useful is in quality adjusting hospital prices in the Consumer Price Index (CPI) and the Producer Price Index (PPI). Currently, the PPI makes some use of these measures, but the methodology used may be problematic as the relationship between the quality measures and hospital costs is unknown. Once the relationship between the quality measures and costs are better understood, it will be possible to revise the existing PPI methods.

This paper estimates the causal relationship between the quality measures and hospital costs. The causal relationship is identified using the instrumental variable technique of Doyle, Graves, Gruber, and Kleiner (JPE 2015) and Doyle, Graves, and Gruber (NBER working paper 2017). They develop an instrument for hospital selection based on plausibly exogenous assignment to different ambulance companies (which have different preferences for hospitals). Doyle, Graves, Gruber, and Kleiner (JPE 2015) look at whether hospitals that have higher Medicare reimbursements have better outcomes. Doyle, Graves, and Gruber (NBER working paper 2017) look at the relationship between the Hospital Compare quality measures and outcome measures.

This paper uses Medicare claims data for the years 2011-2015. Data on hospital admissions is contained in the Inpatient file, and ambulance billing data are contained in the Outpatient and Carrier files. The claims data are linked to hospital specific cost (hospital cost reports) and quality data (Hospital Compare). Preliminary results suggest a relationship between cost and quality but is sensitive to the cost and quality measures used. A complicating factor in the analysis is that CMS began phasing in the use of quality measures in hospital reimbursements during this period.