Ho & Pakes (2014)

Hospital choices, hospital prices and financial incentives to physicians

AER forthcoming
Presented by Atul Gupta

April 14, 2014

Presented by Atul Gupta

Ho & Pakes (2014)

April 14, 2014

1 / 28

Introduction

Institutional background
There are multiple types of payment arrangements between insurers
and providers
Physicians often form Independent Physician Associations (IPAs) or
Medical Groups that jointly negotiate with insurers (typically these
are non-profit groups)
Insurers often enter into capitation based contracts with such IPAs
- paying them a fixed amount per month per member
Hence IPAs/Medical groups share risk with insurers - or might even
take the entire risk on themselves
Depending on the structure of the IPA/Medical group - this risk
maybe passed through to member physicians

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Ho & Pakes (2014)

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Introduction

Institutional background

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Ho & Pakes (2014)

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Introduction

Ho & Pakes: Summary

Authors hypothesize that if physicians are part of a capitation
arrangement, they are more likely to refer patients to a cheaper
hospital
Setting is California in 2003 - authors focus on privately insured
labor/birth episodes (California is well known for being a capitation
friendly market)
Several data limitations allow them to test their hypothesis only
indirectly
Estimate a hospital choice model (joint decision of physician-patient)
Find that referral decision is more sensitive to price for insurance
plans that have a higher capitation share

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Ho & Pakes (2014)

April 14, 2014

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Introduction

Research questions

Does the level of capitation in the insurer impact price sensitivity of

the referral decision (in case of labor/birth episodes)?
Is there evidence to suggest that the level of capitation aects
cost/quality tradeo in the referral decision?

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Ho & Pakes (2014)

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Introduction

Contributions

First structural approach to focus on link between hospital prices and

referral decisions by physicians
Previous literature had shown that HMOs have lower inpatient
admissions and costs than other insurers
Main mechanism for lower cost thought to be lower unit prices - but
not clear why prices are lower

Methodology: Demonstrate how moment inequality approach can be

used to overcome data limitations

Measurement: Provide estimates of price elasticity of referral distance

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Introduction

Data used

Main source is hospital discharge data (2003) in California

For each hospital discharge they observe list price charges, conditions
at admission, procedures performed, demographics of patient, zipcode
of patient and hospital and insurer

Hospital characteristics data (American Hospital Association)

Hospital financial data - provides average discount for each hospital

Insurer financial data - provides share of capitation for each insurer

California birth cohort file (2003) - health outcomes for mother and
infant

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Introduction

Summary Statistics (I)

Table 1 (truncated): Insurer characteristics

Link to table 3

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Models & Results

Hospital choice model

Patient/physician i jointly choose hospital h which delivers highest utility
W
Wi,,h = p, p(ci , h, ) + g (qh (s), si ) + f (D(li , lh )) + i,,h
where
p() is the price insurer ex-ante expects to pay for a patient having
condition ci
qh (s) is a vector of hospital qualities percieved by the
physician/patient, varying by severity s
g is a function which relates quality of the hospital and patients
condition to utility
D() is the distance between the hospital and the patient, f is some
increasing function of distance
i,,h is a structural error term
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Models & Results

Limitations due to the data

Observe discount h but not actual discount

p(ci , , h) not observed

Dont observe the physician - cannot condition on physician

characteristics Zi which probably aect referral decision

Dont observe the physician-hospital network - dont know composition

of the set Hi = {h : hospital where patient i could be referred to}

h,,i

- hence price

Dont observe severity specific hospital quality qh (s) - particularly as

perceived by the physician/patient (may lead to endogeneity)
Observe li and lh with measurement error

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Ho & Pakes (2014)

April 14, 2014

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Models & Results

1. Multinomial logit choice model

Only address the hospital network issue, others remain unresolved
Assumptions:
Patient has access to any hospital within 35/100 miles distance
i,,h is distributed iid Type 1 extreme value
p(ci , h, ) = (1

discounth ) lp(ci , h) (no error)

g = qh + zh x(si ) (hospital quality not severity specific)

f = d1 d(li , lh ) + d2 d 2 (li , lh )
Try dierent structures for price coefficent p - constant across
insurers, insurer specific, constant + capitation-price interacted

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Models & Results

Multinomial Logit results

Table 4 (truncated)

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Ho & Pakes (2014)

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Models & Results

2. Moment inequality approach: Model

Define W (i, , h, h0 ) = W (i, , h) W (i, , h0 ) where individual i
chooses hospital h over all other h0 in her choice set
Similarly define W (i 0 , , h0 , h) = W (i 0 , , h0 )
individual i 0 who chooses h0
By revealed preference,

W (i, , h, h0 ) +

W (i 0 , , h) for an

W (i 0 , , h0 , h)

where
W (i, , h, h0 ) +

W (i 0 , , h0 , h) =

p, [ p(ci , h, h0 ) +

p(ci 0 , h0 , h)] + [ f (li , lh , lh0 ) +

f (li 0 , lh0 , lh )]

How does this help overcome the limitations we discussed earlier?

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Models & Results

Rationale for using moment inequalities

1

Price p(ci , , h) is not observed or observed with error

Argue that measurement error in price cancels out
Construct estimates h, and h,,s in robustness checks

Cannot condition on physician characteristics Zi which probably

aect referral decision ?
Dont observe the hospital-physician networks
Continue with assumption used in logit analysis

Dont observe severity specific hospital quality qh (s) - particularly as

perceived by the physician/patient (may lead to endogeneity)
Re-define severity group to be much finer - cancel out by construction
Argue that redefined narrower price groups no longer correlated with
hospital quality

Observe li and lh with measurement error

Address this (partially) in a robustness check
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April 14, 2014

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Models & Results

What assumptions make this work?

Averaged price measurement error terms pci ,h,h0 =

pc 0 ,h0 ,h
i
when summed over all severity groups for a hospital (by construction)
There is no idiosyncratic error in expected price p(ci , h, )
Possible if you believe patient i will receive the price patients in hospital
h0 of , ci are receiving and there is no unobserved factor driving prices

Specification error term in hospital quality-severity h,h0 ,si and

h0 ,h,si 0 somehow cancel out when averaged over all severity groups
for a hospital
Possible only if specification error is mean zero conditional on distance
and price for a hospital

No measurement error in distance d(li , lh )

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Ho & Pakes (2014)

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Models & Results

Estimation(I): Inequality
Take the inequality on the previous slide and sum over all severity groups
for a hospital h
X

w (h, h0 , s)[p ( p(h,

h0 , s) +

p(h
0 , h, s))+

s,h0 >h

h0 , s) +
d ( d(h,

0 , h, s))]
d(h

where
w(h,h,s) is a weight for the contribution by pairs in {h, h0 , s}

So variation in price across individuals is aggregated up to variation in

price dierences across hospitals

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Models & Results

Estimation(II): Instruments

Use any positive instrument along with the moment inequality above
to estimate the parameters p and d
Error terms must be mean independent of the instrument - in this
case distance is assumed exogenous
Instruments used are positive and negative parts of the distance
h0 , s)+ , d(h,
h0 , s) ...
dierences i.e. d(h,
Each combination of instrument and hospital inequality gives a unique
moment inequality
that satisfies the moment inequality condition for all
Find the set
the moments specified

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Models & Results

Recap: Summary of changes in this approach

1
2

Severity group definition is made much finer using comorbidities

Accordingly price groups are also defined more narrowly
To the point where they argue that price groups are not correlated with
hospital quality

They need to have variation in mean price across hospitals for the
same price group Link to table 5
They finally use variation in p for the same d across hospitals to
pin down the price coefficient - completely dierent data!
They drop the price and hospital quality error terms assuming they
will cancel out by averaging over a hospital

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Models & Results

Inequality approach result

Table 6 (Column 1 only)

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Models & Results

Value of using inequality estimation?

Estimated price elasticity of hospital distance is order of magnitude
higher when using inequality approach
Link to table 8

But remember lots of things changed all at once!

Could they have used an instrumented logit model instead of

inequality estimation?
Yes, but distance cannot be an instrument for price since it enters the
choice model directly
Maybe use a Hausman style instrument? p(ci , , hc ) where hc are
hospitals in other markets
Will still have to deal with structural & measurement error in price - or
concede attenuation bias?
Upside is we need to make weaker assumptions

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Ho & Pakes (2014)

April 14, 2014

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Models & Results

Cost-quality tradeo across insurers

Authors try to bound dierences in quality across hospitals (for given

severity s) using the relation
g (qh , s)

g (qh0 , s)

p p(h,
h0 , s)+
h0 , s) + h,h0 ,s q(h, h0 , s) +
d(h,

h,h0 ,s

where q(h, h0 , s) is observable

Set quality of one hospital per insurer in every market to be zero so
that they can estimate bounds for relative quality of the remaining
hospitals

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Models & Results

Cost-quality tradeo result

Recovered estimates indicate that cost-quality tradeo does not vary with
capitation level of insurer
Table 9

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Discussion

Summary of findings

Referral decision is more price sensitive in case of insurers that have

higher capitation level (as seen in Tables 4 & 6)
Insurers that have higher capitation level also have a higher price
elasticity of distance - their physicians send patients a longer distance
to avoid price increase (Table 8)
Ratio of cost/quality relatively constant across the insurers - hence
capitation does not seem to have a relationship with cost/quality
tradeo (Table 9)

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Ho & Pakes (2014)

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Discussion

Criticisms
Should the measurement error terms

h,h0 ,s and

h0 ,h,s cancel out?

What about structural error in expected price? Would those terms

cancel out? These patients chose dierent physicians/hospitals for
unobserved reasons
What about structural error in hospital quality-severity?
Can we interpret this pattern as causal?
Mechanism at work could be a mix of salience and financial incentives
Recall this is a joint decision - so coinsurance could also be playing a
role in hospital choice
Does the moment inequality approach buy us much over multinomial
logit?

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Ho & Pakes (2014)

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Discussion

Extensions
Can we test this hypothesis more directly?
Model the choice of a physician based on her utility from referring a
patient to a specific hospital - similar to the approach used in Dickstein
(wp 2013)

Since public programs like Medicare and Medicaid typically pay lower
rates than private insurers, would capitation in these programs
exacerbate the impact on referral decisions?
Can test if we recover higher elasticities for Medicaid capitation vs
private insurer capitation

Apart from hospital choice, are there other margins on which

providers cut costs?
Do they prescribe fewer tests/procedures? Do they wait longer to have
normal deliveries?

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Backup slides

Summary Statistics (II)

Table 3: Prices and outcomes by patient type

Back to table 1

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Backup slides

Variation used in inequality approach

Table 5

Back to summary of changes

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Backup slides

Comparing estimated elasticity of logit and inequality

approaches
Table 8

Back to value of inequality approach

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