David Dranove

Assessing the impact of total quality management and organizational culture on multiple outcomes of care for coronary artery bypass graft surgery patients.

OBJECTIVES To assess the impact of total quality management (TQM) and organizational culture on a comprehensive set of endpoints of care for coronary artery bypass graft surgery (CABG) patients, including risk-adjusted adverse outcomes, clinical efficiency, patient satisfaction, functional health status, and cost of care. METHODS Prospective cohort study of 3,045 eligible CABG patients from 16 hospitals using risk-adjusted clinical outcomes, functional health status, patient satisfaction, and cost measures. Implementation of TQM was measured by a previously validated instrument based on the Baldridge national quality award criteria. Organizational culture was measured by a previously validated 20-item instrument. Generalized estimating equations were used to control for potential selection bias, repeated measures, and intraclass correlation. RESULTS A 2- to 4-fold difference in all major clinical CABG care endpoints was observed among the 16 hospitals, but little of this variation was associated with TQM or organizational culture. Patients receiving CABG from hospitals with high TQM scores were more satisfied with their nursing care (P = 0.005) but were more likely to have lengths of stay >10 days (P = 0.0003). A supportive group culture was associated with shorter postoperative intubation times (P = 0.01) but longer operating room times (P = 0.004). A supportive group culture was also associated with higher patient physical (P = 0.005) and mental (P = 0.01) functional health status scores 6 months after CABG. CONCLUSIONS There was little effect of TQM and organizational culture on multiple endpoints of care for CABG patients. There is a need to examine further the relationships among individual professional skills and motivations, group and microsystem team processes, specifically tailored interventions, and organization-wide culture, decision support processes, and incentives. Assessing the impact of such multifaceted approaches is an important area for further research.

Competition and Market Power in Option Demand Markets

An increasing number of markets, particularly health insurance, are characterized by option demand. In option demand markets, intermediaries sell networks of upstream suppliers to downstream consumers; in many cases, consumers must attach a value to the network of suppliers before their needs are realized. Building upon a Logit model of demand, we introduce a method for modeling such markets. Ideally, the intermediaries use their expertise and bargaining power to negotiate better terms than could consumers acting on their own. However, the realization of these savings could be thwarted if the upstream suppliers have significant market power, or are allowed to merge and thereby attain market power. We estimate the model using data on inpatient hospital services in San Diego, California and use our results to simulate the effects of hospital mergers. We find that hospital markets are localized in the sense that mergers among suburban hospitals, or mergers among urban hospitals with considerable service overlap, would lead to significant price increases. This is an important finding. The 1990s witnessed a wave of hospital mergers, relatively few of which were challenged by the Federal Trade Commission or the Department of Justice. At trial after trial, the defendant hospitals prevailed; in most of these cases the judge(s) relied upon patient flow data to conclude that the relevant market is large, and therefore the merger would not be anticompetitive. Our results cast serious doubt upon this conclusion.

Price and Concentration in Hospital Markets: The Switch from Patient-Driven to Payer-Driven Competition

PERHAPS the most widely accepted paradigm of industrial organization (I/O) is that competition lowers prices or, alternatively, that price/cost margins are lower in less concentrated markets.1 The applicability of this paradigm for hospital markets has been questioned. For example, in United States vs. Carilion Health System and Roanoke Valley Hospital, the district and appellate courts accepted evidence that hospital prices are lower in more concentrated markets and thereby approved a merger between the two largest hospitals in a three-hospital market.2 The view that competition has a weak or perverse effect on hospital prices is shared by a number of researchers,3 is a common theme in newspaper stories

Do strategic groups exist? an economic framework for analysis

This paper offers a framework and methodology for resolving the question regarding the existence of strategic groups. We say that a strategic group exists if characteristics of the group affect firm performance independently of firm-level and industry-level effects. We argue that group-level effects are a byproduct of strategic interactions among members, and develop an empirical testing model, based on the ‘New Economics of Industrial Organization,’ to distinguish true group effects from spurious effects. From this model, we derive a series of logically consistent propositions, suggesting that while strategic interactions are critical for a group-level effect on profits, mobility barriers are necessary to preserve both groups and their effects over time. A review of prior empirical studies of strategic groups suggests that the inconclusive nature of prior research has been due more to the lack of a theoretical foundation for empirical analysis than to the nonexistence of groups. To the extent that our methods have been employed, there is limited evidence that a rigorous search for strategic groups may prove fruitful.

Rate-Setting by Diagnosis Related Groups and Hospital Specialization

Under the system of hospital reimbursement for Medicare patients, hospitals receive a prospectively determined price that varies according to the diagnosis related group (DRG) to which the patient is assigned. Rate-setting by DRG encourages hospitals to specialize in those DRGs for which they have relatively low production costs. This may substantially reduce aggregate hospitalization costs if specializing hospitals are efficient. If, instead, hospitals specialize by treating relatively healthier patients within each DRG, cost savings may be mitigated. The wide variation of patient-specific costs within DRGs promotes the latter kind of specialization and reduces the effectiveness of rate-setting.

Economies of scale in non-revenue producing cost centers: Implications for hospital mergers

This paper uses semiparametric methods to estimate the magnitude of economies of scale in 14 non-revenue producing cost centers in hospitals. There are substantial economies of scale in small hospitals, but economies are exhausted in hospitals with over 10,000 discharges annually. In recent hospital mergers challenged by federal antitrust agencies, one or both hospitals had over 10,000 discharges, suggesting that efficiency gains in non-revenue producing cost centers will be small, and could easily be offset by nominal price increases.

Determinants of managed care penetration

This paper examines factors associated with differences in managed care penetration across geographic areas. Two alternative measures of managed care penetration are considered: the percentage of revenue physicians received from managed care contracts and market survey data on enrollments in managed care plans. Results are similar for both types of measures. Our analysis suggests that demographics, labor market characteristics and supply side variables including the level of concentration in hospital markets, hospital occupancy rates and the practice organization patterns of physicians are all important determinants of managed care penetration.

Hospital closure and economic efficiency

We present a new framework for assessing the effects of hospital closures on social welfare and the local economy. While patient welfare necessarily declines when patients lose access to a hospital, closures also tend to reduce costs. We study five hospital closures in two states and find that urban hospital bailouts reduce aggregate social welfare: on balance, the cost savings from closures more than offset the reduction in patient welfare. However, because some of the cost savings are shared nationally, total surplus in the local community may decline following a hospital closure.

The Economic Side Effects of Dangerous Drug Announcements

Immediately prior to the passage of the 1962 Food and Drug Administration Amendments, there were a number of drugs recalled from markets worldwide. Announcements about the dangerous side effects of these drugs were associated with lower share prices for their manufacturers and the industry as a whole. We perform several analyses to sort out alternative explanations for the observed declines. We find that dangerous drug announcements had no effect on the sales of other drugs and did not affect the share values of European drug makers doing little business in the United States. We also find that share price reductions associated with recalls in the 1970s and 1980s were confined to the manufacturers of the recalled drugs. These patterns are consistent with the hypothesis that drug company shareholders viewed the recalls in the early 1960s as signals of an increase in the cost of compliance with new (and more stringent) drug testing requirements.

Medicaid Drug Formulary Restrictions

THE Medicaid program is administered by the states according to guidelines established by the federal government. These guidelines include restrictions on patient cost sharing and on payments to providers. The federal government bears 40-70 percent of program costs (varying by state). This combination of federal subsidization and administrative restrictions presents states with a difficult problem. States would like to extend benefits to as many services as possible. For example, Medicaid programs are far more likely to cover expenditures for drugs, eyeglasses, and appliances than are private health insurance plans.1 At the same time, states would like to be sure that the benefits of marginal health care expenditures exceed their share of costs. Due to federal restrictions, states have limited ability to encourage cost-effective choices by recipients.2 Instead, states often limit expenditures by capping prices and refusing to pay for services judged to be inappropriate. Efforts by states to control Medicaid payments for prescription drugs exemplify this problem. Medicaid payments for prescription drugs exceeded