Quality of Care Chapter 7

Markets and Market Failure For most goods and services in economy, different levels of quality offered Quality a seller provides involves comparison of marginal consumer valuation of increase in (unit of) quality versus marginal cost of increase in quality Generally markets handle quality well—no government regulation of quality of most goods and services (except perhaps for extremely poor quality) Asymmetric information between buyers and sellers rationale for government regulation of quality Asymmetry for credence goods, e.g., emergency room care, some complex and rare surgery, etc. (Search, experience, credence goods)

Markets and Market Failure cont. Relationship between quality and price may be weaker in health markets than in other markets (e.g., for automobiles, Lexus v. Trabant shown on next slide). Few would blame car dealer if its customers have many accidents, but hospitals blamed for this. Health care executives view some investments in quality as unnecessarily expensive which suggests financial incentives for quality improvement lacking, e.g., internal health information systems.

How Economists View Quality? Good quality comes at a cost. If people are willing to pay more to cover the added cost of higher quality, markets should provide it. If not, do not provide it. It is generally unnecessary to explicitly measure quality. This is in the eye of the beholder. E.g., whether or not a home improvement is worth it.

4 Mechanisms for Improving Quality of Health Care Services Professional norms Public regulation (licensure) Reliance on market forces or combination of public regulation and market forces Tort law

Ways to Measure Quality of Health Care Services (Avedis Donabedian) Structure Process Outcome

Which measure of quality is best? Might think that outcomes are best measure but Data may be unavailable Adverse outcomes occur for reasons other than medical quality (e.g., because patients do not adhere to MD recommendations, patient frailty) Adverse outcomes take long time to be realized (e.g., repeat heart attacks) Stochastic element in health outcomes (e.g., genetic variation)

Iatrogenic Injuries What they are Iatrogenic injury rate one calculates sensitive to where analyst draws line along a spectrum High rates estimated for U.S. hospitals. Plausibly even higher rates in middle-and low-income countries even though some injuries reflect use of advanced technology. Will have some iatrogenic injuries even when care level set at socially optimal level

Do observed rates of medical errors and adverse outcomes represent market failure justifying government or other intervention? This depends. Need to think about sources of consumer lack of knowledge currently. There are private mechanisms for disseminating consumer information about quality, at least generally, e.g., Consumer Reports. If there is demand for consumer information, would expect private vendors of such information to enter.

Public Good Aspect of Provision of Information on Quality Consumer Reports (U.S. magazine that rates goods and services on quality) case Public goods aspect as applied to health care—localized feature

Regulation of Quality of Care: Supply Side Targets Professional norms Peer review Licensure Certification

Mandatory Error Reporting What it is Medicare experience with error reporting Empirical evidence on effects of mandatory error reporting Implications

Role of Tort Law What it is Rationale Socially optimal injury rate Alternative liability rules Contracts versus torts Criticisms of tort as applied to medical errors Empirical evidence on deterrent effects of tort

The Socially Optimal Injury Rate Conceptually, the goal of injury prevention is to minimize the total cost of injuries consisting of the costs resulting from the injury injury (medical care and rehabilitative services, associated with reduced longevity, increased disability, pain and suffering as well as losses to property) the costs of averting it. (investments in the goods or services themselves and in redundancy to the time and effort involved in monitoring)

The Socially Optimal Injury Rate, cont. Let e = potential injurer’s expenditure on accident prevention during specific time period, Θ(e) = probability of an accident occurring, D(e) = total loss incurred by the accident victim(s) should an accident occur As potential injurer spends more resources to avoid injury, probability of accident (Θ) and total loss from accident (D) declines.

The Socially Optimal Injury Rate, cont. Socially optimal injury/accident rate at level of e at which e + Θ(e)D(e), total injury cost (7.1), at a minimum. Lesson from economics: with cost of avoidance > 0, socially optimal rate is > 0.

Fig. 7. 1. Total Cost of Injury Prevention and Expected Fig. 7.1. Total Cost of Injury Prevention and Expected Accident Cost (Social Cost) and Optimal Care

Negligence rule operates under medical malpractice Plaintiff must prove that (1) injury occurred, (2) injury was caused by action or inaction of defendant (health care provider), and (3) defendant was negligent. Negligence defined as level of care below community standard In economics, this standard is the point at level of e at which (7.1) is at minimum.

Negligence Rule, cont. Defendant pays nothing if e ≥ e*. She is not negligent. If e < e*, the defendant is negligent and pays the accident victim’s loss Thus, for e ≥ e*, the defendant’s cost = e. For e < e*, the defendant’s cost is e+ Θ(e)D(e) The potential injurer’s cost is lowest at e* (Fig. 7.2).

Fig. 7.2. Potential Injurer’s Choice of Care Under a Negligence Rule

Negligence Rule, cont. In theory, negligence rule gives potential injurers economically efficient incentive to exercise due care. But this assumes that courts set standard of care at e*. There may be errors in this. If standard is set too high, there will be defensive medicine (too much care). If set too low, there will be too little care.

Negligence Rule: Only 1 of Several Liability Rules Strict liability: injurer bears loss if it is determined that injurer caused the loss. There is no negligence standard. Returning to Fig. 7.1 above, if potential injurer faces a strict liability rule, s/he would select the optimal amount of care e* since this investment in care minimizes his/her expected loss.

Contract v. Tort Alternative to tort, provide incentives for injury prevention under contract. In some areas, not feasible to contract, e.g., to prevent motor vehicle accidents since parties are strangers. But in health care, contracting is potentially feasible, e.g., between enrollees in Health Maintenance Organization and the HMO.

Coase Theorem If all parties fully information about risk and contracting is costless, allocation of resources to loss prevention is same whether or not losses reside with injury victim or with the injurer. Discuss implications in context other than health care. Discuss implications in context of health care.

Still another regime (in addition to negligence and strict liability) No (third-party) liability. This occurs under no-fault plans, which are common in motor vehicle insurance and in some countries apply to medical (iatrogenic) injuries as well.

Medical Malpractice: Tort Liability in a Medical Context

4 Medical Malpractice Markets Medical care market Legal market Insurance market Public policy market

Defensive Medicine Distinction between positive and negative medicine Empirical evidence on positive defensive medicine

Does the Threat of a Medical Malpractice Suit Deter Bad Care? Medical malpractice has several goals, such as deter injuries, compensate injury victims, mete out justice, etc. Does it deter bad care injuries? Empirical evidence to date suggests it does not? Discussion question: Does this mean that medical malpractice should be eliminated in favor of a no-liability regime, e.g., no-fault?