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  • May 2020
  • Article
  • Quarterly Journal of Economics

Identifying Sources of Inefficiency in Health Care

By: Amitabh Chandra and Douglas O. Staiger
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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.

Keywords

Health Care and Treatment; Performance Efficiency; Performance Productivity; Mathematical Methods

Citation

Chandra, Amitabh, and Douglas O. Staiger. "Identifying Sources of Inefficiency in Health Care." Quarterly Journal of Economics 135, no. 2 (May 2020): 785–843.
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About The Author

Amitabh Chandra

Technology and Operations Management
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More from the Authors
  • Expert Patients’ Use of Avoidable Health Care By: Amitabh Chandra, Pragya Kakani and Simone Matecna
  • The Health Costs of Cost Sharing By: Amitabh Chandra, Evan Flack and Ziad Obermeyer
  • Medicare Part D Protected-Class Policy Is Associated with Lower Drug Rebates By: Pragya Kakani, Michael Anne Kyle, Amitabh Chandra and Luca Maini
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