Healthcare cost & quality

For more information, contact Jeff Bendix, 216-368-6070 or jxb34@po.cwru.edu.

Posted 11-22-99

Do higher insurance premiums yield better health care?

The price of a product usually acts as a kind of signal to its quality. The more we pay for something, the better we expect it to be.

But when it comes to health care, the link is sometimes harder to discern. That's because health insurance pays for all or part of many medical services, so the person receiving the service doesn't know the real cost of what they are getting. As a result, the price/quality relationship becomes blurred.

Clarifying that relationship is the goal of a three-year study by Avi Dor, the John R. Mannix associate professor of health care economics at the Weatherhead School of Management, and associate director for research at the Health Systems Management Center.

Dor recently received a $398,000 grant from the prestigious U.S. Agency for Health Care Policy and Research, an arm of the National Institute of Health, to fund the project.

In addition to his work at CWRU, Dor is a fellow at the National Bureau of Economic Research, a leading think tank based in Cambridge, Massachusetts. He will be carrying out his research under the auspices of NBER.

While the country has been debating what to do about the steadily rising cost of health care, most of that discussion has focused on rising health insurance premiums and the declining numbers of people covered by insurance. Few researchers have looked at the relationship between the price and quality of medical care.

Because so much of the country's medical care today is paid for by health insurance, Dor explains, "we know that the price mechanism in the normal sense doesn't exist in the health care market, because the link between the consumers and the providers has been severed. So the question becomes, is higher-quality care rewarded with higher prices or not?"

Dor and his fellow researchers will focus their research on cardiac procedures, such as coronary bypass surgery and angioplasty, comparing price and quality at selected hospitals. Among the exciting aspects of the project, Dor says, is that it will be researched using databases from companies in the private sector. This is different from the experience of most researchers in the field.

"In the past most research projects have relied on government databases, which are inexpensive and widely available, but they only deal with Medicare and Medicaid beneficiaries," Dor explains. "From our perspective, it is much more interesting to analyze what is happening in the private sector, where the most dynamic changes occur."

Dor has assembled a team of experts in medicine, epidemiology, and economics to undertake the research. They include Michael Grossman, co-director of health economics at NBER; Zhong Yuan, senior research associate in the Department of Epidemiology and Biostatistics at the School of Medicine; and C. Kent Kwoh, associate professor in the Department of Medicine, who will provide clinical input.

Much of the work on the project will consist of determining the actual payments hospitals receive for specific services they provide. To date few researchers have looked at the issue of pricing. It is a complex issue, Dor says, because those who pay for health services -- usually insurance companies or large corporations who are self-insured -- frequently bargain with hospitals and physician groups to obtain volume discounts for procedures.

"You have this complex negotiation process between large purchasers on the one hand, and the health care providers on the other hand. That's what determines the package of services available to patients, including utilization limits and caps on fees."

For the quality side of the equation, the research team will mine the databases to compare expected mortality rates -- given a patient's underlying medical condition -- with actual mortality. That comparison will produce a statistical measure of how good the hospital is for the given procedure, Dor explains.

Dor expects the results of his research to be useful primarily to those paying for and monitoring health care -- insurance companies, employers, consumer groups, and individuals. But health care providers may be interested, too. "They may want to measure themselves against their peer group," he says.

Another aspect of the research will focus on the impact of competition among both health care providers and payers. "Market power, not just outcome, is an important determinant of prices," Dor explains. "Insurers want discounted prices and hospitals want to maintain pricing power. That's how the supply and demand process is supposed to work. But because of this indirect way in which prices of medical services get determined, we don't know what is happening at the level of key procedures."

Dor says CWRU is "an ideal place for a health economist to launch a research project that has an interdisciplinary focus because of its excellent medical and business schools. There are issues straddling the two disciplines that can be explored and provide a great opportunity for collaborative research for years to come."

-CWRU-