Recent Performance Measurement and Rewards Research

Research Performance in Government and Nonprofits

When For-Profits and Nonprofits Coexist

IPR economist Burton Weisbrod, John Evans Professor of Economics, continues to examine mixed industries such as hospitals, nursing homes, higher education, and book publishing. In reviewing their activities, he asks why these different types of profit and nonprofit organizations act the same in some markets—where outputs are profitable—but differently in others where outputs are unprofitable but socially desirable? He uses a two-good model of organizational behavior to explain how ownership affects output choice, why nonprofits and for-profits choose outputs that are both alike and different, and how these forms can coexist despite differential constraints. He is testing the model both in higher education and the mixed hospital industry. In the latter, he sees substantial support for its prediction that for-profit firms will produce a more limited range of services than governmental and private nonprofits.

Invited Scholars Address Performance Measures

Over the year, the IPR Seminar Series on Performance Measurement and Rewards in the Public and Nonprofit Sectors brought in scholars from many different fields. In addition to healthcare economist Jonathan Skinner of Dartmouth the series also welcomed law and health policy professor David Hyman of the University of Illinois at Urbana–Champaign on May 7. He compared how states vary in public reporting of hospital infection rates. On April 23, Northwestern police researcher Mark Iris explained how his analysis of lawsuit payments alleging police misconduct could serve to measure performance in the Chicago Police Department.

Healthcare Markets and Regulation

Economics at the Federal Trade Commission

Healthcare economist and IPR associate Leemore Dafny’s research has covered many aspects of the healthcare industry, including competition, reform, anticompetitive behavior, and hospital mergers. So perhaps it was not surprising that the Federal Trade Commission (FTC), with half of its caseload devoted to healthcare issues, should call and ask her to serve as its first Deputy Director of Healthcare and Antitrust in its Bureau of Economics. Dafny spoke about her year at the FTC, which ended in August 2013, at an IPR colloquium. In describing rising consolidation in the industry, she noted how robust competition is vital to achieve more efficient outcomes in the U.S. health system. More hospitals are merging, physicians are forming larger groups, and insurance is growing more concentrated. While bigger could be better, Dafny noted, it does not seem like it is. Research indicates prices go up, but quality does not improve. While at the FTC, she worked on three key anti- trust issues: horizontal combinations, such as hospitals merging with other hospitals; unilateral anticompetitive conduct, such as attempts by incumbent firms to create barriers to competitors’ entry into a market; and coordinated conduct, which includes price fixing. She said she found the agency’s use of economic research in its investigations eye-opening. She also co-authored a recent journal article with four FTC economists summarizing how the FTC deploys economic analyses to fulfill its mission. Dafny is Herman Smith Research Professor in Hospital and Health Services.

Leveling the Field: Group and Individual Insurance

Sixty percent of Americans under the age of 65 get their health insurance through their employers. Around 80 percent of employers offering employee health plans only provide one selection. In a 2013 article published in the American Economic Journal: Economic Policy, Dafny and her co-authors examine what it might mean to employees if they were offered more options for health plans. Using 1998–2006 insurance data from a national sample of more than 800 large U.S. employers, the researchers investigate how employees' plan choices would change if they had the option to select any plan offered in their market area at premiums that reflected the health of employees at their firms (i.e., the premiums they would likely face if their employers added the plans to their offerings). Even under conservative assumptions, the authors report “choice is worth quite a bit for most individuals,” and many employees would benefit from having a greater variety of health plans available to them. A median employee would be willing to give up 16 percent of her health insurance subsidy from her employer to have the freedom to use the remaining amount for a plan more closely aligned with her preferences. This finding suggests that the value of choice—a key feature of private and public insurance exchanges—is worth accounting for.

Impact of Insurance on Older Americans

Most observational studies indicate those without health insurance are more likely to die at an earlier age than those with it. Such results have also appeared in health policy debates over the Affordable Care Act to support claims of health insurance being a matter of life and death. Yet a new working paper comes to a much different conclusion using data from the Health and Retirement Study, the same data sets used in several previous studies. Law and finance professor Bernard Black, an IPR associate, and his co-authors investigate the effect of health insurance on the death rate over 18 years for more than 10,000 near-elderly Americans, who were between the ages of 50 and 61 years old in 1992. Their study differs methodologically from previous ones in several different ways, including using a more complete set of covariates, employing time-series estimates, and providing separate estimates for the uninsured and the insured. Those uninsured in 1992 were less likely to go to the doctor or the hospital, or have prescriptions filled. Despite using fewer healthcare services overall, the uninsured were as healthy as—and died at the same rates as— the insured over a 12–14 year period. Their evidence suggests that prior studies overestimated the health and mortality benefits of health insurance for the uninsured. Black is Nicholas J. Chabraja Professor of Law and Finance.

Do Hospitals Shift Costs to Make Up Losses?

In a new working paper, healthcare economist and IPR associate David Dranove and his co-authors, Craig Garthwaite at Kellogg and Christopher Ody of the Federal Reserve Bank of Philadelphia, investigate the theory of cost-shifting in healthcare. Does research substantiate claims that healthcare providers, such as hospitals, try to make up losses by charging privately insured patients more? This is an important question, the researchers point out, because cost-shifting is often invoked in health policy discussions. President Obama used it in 2009 to describe the broad benefits of ACA reform, stating that the average insured family pays $1,000 in extra premiums to subsidize those treated in the emergency room without insurance. The U.S. Supreme Court also employed it in upholding the ACA’s constitutionality. Though a 1988 study by Dranove found evidence for cost-shifting, the market has dramatically changed since then. Using 2003–2010 data from various sources, the authors trace how hospitals, all of which rely on endowments to some degree to finance their operations, responded following the 2008 stock market collapse. They show that in a period marked by large endowment losses, the average hospital did not engage in cost-shifting. “High-quality” hospitals, however, seemed to. In investigating this further, the researchers find that these larger, market-dominant hospitals responded to large drops in their endowments by delaying major technology purchases and cutting down on unprofitable services, such as trauma care. They underscore how these alternate responses can lead to “broad changes in the quality and availability of health services for all patients.” Dranove is Walter J. McNerney Professor of Health Industry Management.

Examining U.S. Healthcare and the ACA

The Affordable Care Act (ACA) is the largest change to the U.S. healthcare system since President Lyndon Johnson signed Medicaid and Medicare into law in 1965. Over the year, including after the October 1 rollout of, IPR welcomed several speakers who shared their research and perspectives on the ACA and related healthcare issues. MIT healthcare economist Jonathan Gruber, a key architect of the ACA, described how the move to universal coverage in Massachusetts under then-Governor Mitt Romney became the basis for the ACA in a March 7 lecture. Healthcare economist Jonathan Skinner pointed to how his model of patient demand and supplier behavior explains the parallel trends of growth in technology and medical costs on October 8. Healthcare economist and former Bush economic adviser Katherine Baicker tackled what her evaluation of the Oregon Medicare Health Insurance Experiment might indicate about the new healthcare law in a lecture on October 28.

Accountability Measures for Service Industries

The Perils of Pay for Performance

Government and nonprofit activities are often difficult, if not impossible, to measure and also to assign monetary value to. As a result, these difficulties prevent the adoption of systems that align rewards with “performance.” Weisbrod is writing a book under contract with Stanford University Press to consider the unintended—but foreseeable—consequences of the rising tide of efforts that often involve adopting incomplete and biased measures of “performance” and then rewarding it. Titled “The Perils of Pay-for-Performance: Why Strong Rewards in the Public and Nonprofit Organizations Do Not Work,” the book will cover a wide array of public and nonprofit sector services, such as higher education, hospitals, policing, museums, private charities, and the federal judiciary, in addition to K–12 education. For example, the debate surrounding No Child Left Behind (NCLB) has centered on whether the strong rewards for performance under NCLB—and its increasing reliance on measurable performance—should be expanded to other areas of government and the nonprofit world.

Deterrent Effect of Medical Malpractice Reform

In a working paper with Northwestern economist Zenon Zabinski, Black studies the impact of tort law on medical malpractice reforms. The two investigate states that adopted caps on noneconomic, “pain-and-suffering” damages during the 2000s. These caps led to a large drop in claim rates and payouts. Did lowering medical malpractice liability also affect patient safety? To study this, they use Patient Safety Indicators (PSIs), which measure hospital complications and adverse incidents following surgeries, procedures, and deliveries that are often preventable. They show that before reform, PSI rates either held steady or declined in tort reform states, relative to control states. Following passage of the caps, Texas PSI rates gradually rose, as hospitals seemed to relax their PSIs. These results are consistent across cap-adopting states. The study suggests that medical malpractice liability spurs healthcare providers to pay attention to patient safety. When there is less risk of liability, normally preventable hospital mistakes increase. This implies a need for policies to maintain hospitals’ patient safety rates in states that have adopted strong damage caps.

Improving Clinical Health Guidelines

Partial knowledge of patient health status and treatment response is a pervasive concern in medical decision making. Clinical practice guidelines (CPGs) make recommendations intended to optimize patient care, but partial knowledge typically makes this difficult. In the Proceedings of the National Academy of Sciences, IPR economist Charles F. Manski uses decision analysis to consider how CPGs can be improved, noting a recent Institute of Medicine report on CPGs did not conduct a formal analysis. Manski’s analysis consists of three steps. The first poses a welfare function and characterizes optimal care, the second describes partial knowledge of response to testing and treatment that might realistically be available, and the third considers decision criteria. Manski argues that CPGs should continue to characterize medical knowledge for clinicians, but he is skeptical about whether they should continue to make recommendations for patient care because of the situational factors. He suggests a greater reliance on specialists and strong consideration of individual cases might improve patient care. Manski is Board of Trustees Professor of Economics.