Why Don’t More Hospitals Compete on Quality?

Go to the website of the Detroit Medical Center and you will learn that its facilities are ranked among the “nation’s best hospitals” by US News & World Report and that they have won other awards. The Detroit Medical Center has some of the “best” heart doctors, it is “tops” in cancer care, and it ranks among the “nation’s safest hospitals.” Three of its hospitals, for example, meet standards established by The Leapfrog Group, an organization established by large employers and funded by the Business Roundtable to advise on healthcare quality. Two have received Leapfrog’s “top hospital” award. The Detroit Medical Center’s website informs you that the DMC “is dedicated to staying ahead of the crowd when it comes to the quality of our care…. If you want a hospital with walking trails or a day spa, go someplace else,” the site advises. “Just don’t expect the latest in patient safety technology. Because 100-percent medication scanning is only at DMC.”

Why aren’t more US hospitals competing for patients in the same way the Detroit Medical Center does? Why isn’t Detroit Medical Center competing more aggressively? Some hospitals in India, Thailand, and Singapore, for example, disclose their infection, mortality, and readmission rates and compare them to such US entities as the Cleveland Clinic and the Mayo Clinic. Clearly, the Detroit Medical Center is also competing on the time price of care. It guarantees an appointment within seventy-two hours for MRI scans and promises to report to your doctor within twenty-four hours after the procedure. So why doesn’t it also compete on the money price of care by posting fees patients can expect to pay?

Think of healthcare as having three dimensions: a quantity dimension (e.g., the units of service third-party payers typically pay for, such as office visits, diagnostic tests, etc.), a quality dimension (e.g., such factors as lower infection, mortality, and readmission rates, etc.), and an amenities dimension. By increasing the quality of care and the amenities surrounding that care, providers can make their basic services more attractive to patients, provided they have an incentive to do so.

As in the market for other goods and services, people pay for care with both time and money. What makes healthcare unusual is that for most patients, the time price of care is a greater burden than the (out-of-pocket) money price of care—since third-party payers pay all or almost all of the provider’s fee. For primary care, emergency room care, ancillary services, and an increasing number of traditional hospital services, time is the principal currency patients use to purchase healthcare in the United States, just as it is in other developed countries.

In a third-party payment system, the provider’s fee, including the money price paid by the patient, tends to be set by an entity outside the doctor-patient relationship. For a given unit of service and a given total fee, that leaves a time price, quality, and amenities. Of these three variables, however, only two are typically visible or inferable. The quality variable is normally hidden. As patients respond to what is visible and move back and forth among providers, there will be a tendency toward uniform wait times and uniform amenities. (Think of these as the market clearing time price and the market clearing level of amenities.) Or, if there is a trade-off between waiting and amenities, the rate of substitution will tend to be uniform.

There are no natural equilibrating forces bringing about uniform quality of care, however. As long as quality differences remain invisible, they can persist without affecting the patients’ demand for care. This is consistent with the findings that the quality of care varies considerably from provider to provider and facility to facility, as well as the discovery that variations in the quality of care delivered are unrelated to the kind of insurance people have or even whether they are insured at all. (Note, however, that most measures of quality are measures of inputs, not outputs; at least one study finds there is little relationship between these inputs and such outputs as reduced mortality; and some have questioned whether even hospital mortality rates are reliable indicators of quality.)

For more, see my book Priceless: Curing the Healthcare Crisis.

[Cross-posted at Psychology Today]

John C. Goodman is a Research Fellow at the Independent Institute, President of the Goodman Institute for Public Policy Research, and author of the Independent books, Priceless: Curing the Healthcare Crisis and A Better Choice: Healthcare Solutions for America.
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