Premium Service: Comparing Cost and Quality for Outpatient Surgical Services

While in most markets, the link between price and quality is clear, in health care, despite accounting for 17% of GDP, whether higher-priced providers deliver higher-quality care is not well understood. Estimating this relationship is challenging—the same characteristics that influence which provider a patient receives care from are undoubtedly influenced by patient risk factors, many of which are unobservable. This paper focuses on the relationship between the use of low-priced providers and quality in the market for outpatient surgery. In particular, I focus on three surgical services—joint arthroscopy, cataract surgery, and colonoscopy—that have definable clinical quality measures. These three procedures account for approximately 2.5% ($23 billion) of spending by commercial insurers and have wide variation in prices.

This variation in prices is partially explained by a unique feature of the outpatient surgery market, in that two distinct types of provider organizations commonly perform these services—hospital outpatient departments (HOPDs and ambulatory surgical centers (ASCs). Due to both their lower cost structures and lower bargaining abilities with insurers, ASCs tend to have lower prices that are approximately 50% lower than HOPDs.

This paper examines if this difference in prices is linked to differences in quality. To address the endogenous use of ASCs, I use a state-level source of exogenous variation that impacts the entry of ASCs. 26 states and Washington, D.C. states have Certificate of Need (CON) laws specifically for ASCs.

These laws restrict entry by ASCs, and thus limit the availability of ASCs in states with ASC CON laws. My first-stage estimates imply that ASC CON laws are associated with a 10.7 percentage point (18.1%) reduction in the probability that a patient receives care from an ASC.

I find that the effects of receiving care at an ASC vary by surgical service. For arthroscopy services, I find no difference between ASCs and HOPDs. However, for cataract surgery, I find that receiving care at an ASC leads to substantially higher rates of procedural complications. For colonoscopies, I find the opposite effect–ASCs have much lower rates of complications than ASCs.

I next use the same empirical approach to examine two extensions–the more general relationship between price and quality, and the effect of market concentration on quality outcomes. By impacting the availability of ASCs, which are often low-priced providers, state CON laws for ASCs also impact the price of each treatment. The first-stage results imply that outpatient surgery prices are 5.5% higher in states with ASC CON laws than in states where entry by ASCs is not restricted, but there is little impact on quality. For market concentration, I find that CON laws for ASCs increases market concentration by approximately 24%, and that the effects of market power on quality vary by procedure.