The Effect of Performance Standards on Health Care Provider Behavior: Evidence from Kidney Transplantation

• Published date: 01 December 2016
• Date: 01 December 2016
• Author: Richard A. Hirth,Sarah S. Stith
• DOI: http://doi.org/10.1111/jems.12161

The Effect of Performance Standards on Health

Care Provider Behavior: Evidence from Kidney

Transplantation

SARAH S. STITH

Department of Economics

University of New Mexico

Albuquerque, NM

ssstith@unm.edu

RICHARD A. HIRTH

Department of Health Management and Policy, School of Public Health

University of Michigan

Ann Arbor, MI

rhirth@umich.edu

Performance standards are designed to ensure a basic level of quality,and through public reporting

of firm performance, encourage firms to compete on quality thus allowing the market to determine

the optimal level of quality. In markets with substantial excess demand, however, demand effects

may be insufficient to induce any change in firm behavior and enforcement may be required to

ensure high quality. Even with enforcement, quality still may not improve at underperforming

firms if gaming the system is less costly than improving quality.We test whether information alone

or with regulatory enforcement improves outcomes or elicits gaming behavior in our study of 266

kidney transplant centers between 2001 and 2012. In a context of excess demand induced by price

controls, we show that information alone has no impact and enforcement may actually increase

market inefficiencies; firms respond to costly quality requirements, not by improving quality,but

by reducing supply, which exacerbates the disequilibrium between supply and demand, and by

cream-skimming, which reduces access to transplantation among sicker patients.

1. INTRODUCTION

The use of publicly reported quality data by regulators theoretically should address

market failures associated with a lack of competition and incomplete information, thus

increasing market efficiency including improvements in quality. Consumers will make

better informed choices leading to increased competition among firms and overall qual-

ity should increase by avoiding the low-quality equilibrium predicted in Akerlof’s (1970)

paper on used cars. Public and/or private reporting of product or service quality oc-

curs in many sectors (e.g., automobile safety test data are reported by the National

Wethank the Robert Wood Johnson Foundation Center for Health Policy at the University of New Mexico and

the Ross School of Business at the University of Michigan for the financial support necessary to purchase the

data used in this paper as well as Tom Buchmueller, Brady Horn, Alan Leichtman, Lauren Nicholas, seminar

attendees at IUPUI and the RWJF Center for Health Policy,and participants at the Fifth Biennial Conference of

the American Society of Health Economics for helpful comments. In addition, “this work is supported in part

by Health Resources and Services Administration contract 234-2005-370011C. The content is the responsibility

of the authors alone and does not necessarily reflect the views or policies of the Department of Health and

Human Services, nor does mention of trade names, commercial products,or organizations imply endorsement

by the U.S. Government.” http://optn.transplant.hrsa.gov/data/citing.asp

C2016 Wiley Periodicals, Inc.

Journal of Economics & Management Strategy, Volume25, Number 4, Winter 2016, 789–825

790 Journal of Economics & Management Strategy

Highway Traffic Safety Administration whereasquality reviews and reliability data are

reported by private sector organizations such as the Consumers Union). However,qual-

ity reporting and standards are particularly prevalent in health care due to the extent

of information asymmetry between producers and consumers and the significant (and

often irreversible) consequences of receiving poor quality care. More broadly, quality

reporting is a key component of a health care policy strategy to overcome market failure

by empowering consumers to be agents of change in efforts to improve quality and

contain costs. When quality standards are enforced by regulators, in addition to public

reporting of quality, the incentives for firms to provide high-quality services should be

further increased. However, demand side responses might decrease with enforcement

if consumers can depend on regulators to ensure quality.

Unfortunately,many such regulated markets (e.g., in health care) suffer from addi-

tional market failures that make the implications of quality reporting and enforcement

less obvious. For example, and as we will test in this paper, if the introduction of pub-

lic quality reporting occurs in a market with significant excess demand, any consumer

response will be insufficient to induce a change in firm behavior. Introducing quality

enforcement without any change in the price will likely only exacerbate the disparity

between supply and demand as firms choose not to serve their less profitable customers.

Such cream-skimming behavior could be further exacerbated in the presence of insuffi-

cient risk adjustment or if the quality measure is difficult for firms to affect.

In transplantation, some form of quality monitoring, based on one-year posttrans-

plant patient and organ graft survival, has existed since 1991. Beginning in 2001, this

information has been publicly available online through the Scientific Registry of Trans-

plant Recipients (SRTR) with new reports issued every six months for all transplant

programs.1The standards are monitored by the Department of Health and Human Ser-

vices through the Organ Procurementand Transplantation Network (OPTN). The OPTN

generally has taken an advisory rather than punitive role with transplant centers that

failed to meet the survival standards. In response to concerns about a lack of enforcement

by the OPTN, the Centers for Medicare and Medicaid Services (CMS) began enforcing

the OPTN quality standards with the threat of an expensive audit and possible closure of

noncompliant transplant centers, starting on June 28, 2007 (CMS, 2007). Other insurers

also require that centers meet these or stricter standards in order to remain part of their

provider network.

Using a simple model of the supply and demand for kidney transplants, we pre-

dict that information alone will be insufficient to cause a change in supplier behavior,

primarily due to the existence of significant excess demand induced by a price ceiling. In

the presence of enforcement, we expect centers to improve outcomes primarily through

gaming behaviors; they will do so both when noncompliant and preemptively when

approaching noncompliance.

As our model predicts, we find no impact from information alone. All our results

are only statistically significant after June 28, 2007, when CMS increased its oversight of

transplantation. Enforcement leads to more cautious behavior at the average transplant

center and induces a significant gaming response in noncompliant centers or centers

approaching noncompliance. Our results indicate, however, that despite a strategic re-

sponse from transplant centers, no evidence of a statistically significant improvement

in reported posttransplant survival rates exists. We only see evidence of changes in

“gaming” outcomes. Noncompliant centers decrease transplant rates for both deceased

1. http://www.srtr.org.

Health Care Provider Behavior 791

and live donor transplants and increase the number of patients removed from the wait-

list as too sick for transplant or transferred to another center. We also find evidence of

preemptive behavior based on the publicly posted information in the CMS enforcement

period; centers respond to almost breaching survival thresholds in a similar but muted

manner relative to their response to reports documenting regulatory noncompliance.

Our theoretical prediction that any demand shift will not impact the quantity or quality

of transplants (due to excess demand) and the lack of any effect on outcomes prior to

the introduction of CMS enforcement suggests that transplant center responses are the

primary drivers of our results and affecting demand does not have a meaningful impact

on providers, as long as the regulated price falls far below the market clearing price.

Our predictions for the effects of information on supply and enforce-

ment/noncompliance on demand arise from market features that are not unique to

kidney transplantation. Shifts in demand with the availability of information can be ex-

pected in other industries with significant asymmetric information, such as insurance,

pharmaceuticals, and investment banking. Imperfect competition leading to downward

sloping demand curves is the rule, not the exception, in essentially all markets. Price

controls (or excessive quality) lead to excess demand, the main reason why information

alone is not enough. Such controls exist in many markets, especially within health care

due to the ubiquitous use of Diagnosis-Related Groups in the United States, which pay

the same for a given procedure (e.g., kidney transplant, cardiac bypass surgery) regard-

less of the actual costs incurred. Maybe even more significantly, many countries have

national health insurance systems that explicitly control prices and/or facility budgets

(e.g., the United Kingdom and Canada), leading to waiting lists for many services be-

yond transplantation, suggesting that similar dynamics could occur much more broadly.

Even in the United States, Medicaid patients often face similar access issues as in coun-

tries with national health insurance systems. In addition, most transplant centers are

located in not-for-profit hospitals, as is common in other countries, and as is common

among larger hospitals (greater than one hundred beds) in the United States.2

In terms of the use and implications of quality measures, transplantation is also

not unique. By definition, any payment change from volume of care (traditional fee-for-

service payment) to value-based purchasing requires metrics other than units of services

delivered. Quality/performance measures are often specifically rewarded, and even

when they are not, as in some bundled payment systems, quality needs to be monitored

implicitly or explicitly to ensure against unintended consequences. Although we study

one specific context, the issues we raise (topped out measures, intrinsic competition on

quality/performance, gaming of measures) have been shown to arise both theoretically

and empirically in health care and beyond (Heckman et al., 2011).

Prior U.S.-focused studies in health economics focus on the importance of informa-

tion availability (through report cards) without enforcement of performance standards.

In general, these studies use data on coronary artery bypass graft surgery, a complex

medical procedure with comparable short-run mortality rates to those in kidney trans-

plantation, the most common and least complex type of organ transplantation.3We

2. The 2007 American Hospital Association survey,which includes 231 of the 239 kidney transplant centers

operating in 2007 based on the OPTN data, shows that 72% of kidney transplant centers are in not-for-profit

hospitals, 20% in government-owned, and 8% in for-profit. This differs from the general sample of hospitals

in the 2007 AHA data, but if we restrict the sample of AHA hospitals to just to larger hospitals (over 100 total

beds), which includes all but two transplant centers, the non-kidney transplant center ownership types are

similar to those in kidney transplantation with 65% not-for-profit, 19% government-owned, and 16% for-profit.

3. Our results are arguably more geographically generalizable than the results in the existing literature.

Although heart disease does exceed kidney disease in prevalence, the report card initiatives studied in the