Overview of research on h

care efficiency

Paul G. Barnett, P

February 23, 20
Scope of this talk

 Definition of health care efficienc Efficiency concepts Methods of measuring efficiency Methods of measuring efficiency Wa

y 

s to achieve health care effici

 Ethics and new applications
What is efficiency?

 A measure of performance Identifies resources used to create 

care products care products

 Efficiency considers both inputs a

outputs
An efficient 

provide

 Maximizes output for a given set o

inputs

 Minimizes in

p g ut for a 

given set of 

outputs
What types of health 

products should be 

measured?
Simple production 

function

On

One 

Constant returns t

Output

AB

Input
Production functio

On

One 

Fix

Output

A Economies oB

Input
Isoquants

Points of equal quantity o

Input 2

Q

Q2

1

Q0

Input 
Cost-minimization

Two firms wit

pro

Input 2 Which is most ef

A

B

Q

1

Input 
Cost-minimization

Firm on lowest iso-c

is more e

C

Input 2

2

C

0

C

1

A

C

B

Q

1

Input 
Types of efficiency

For firm A pro

Technical efficiency

C Allocative efficiency

Allocative efficiency

Economic efficiency

=OB/OA 

Input 2

C

2

C

0

C

1

B B’

A

O

Q

1

C

Input 
Methods of measuring he

Methods of measuring he

care efficienc

y

 Data Envelope Analysis (DEA

Data Envelope Analysis (DEA

 Stochastic Frontier Analysis (S Population and Episode Group Small i i l i ll Area Var

iat

ion Ana

lys

i

s
Data Envelope Analy

 Production frontier plotted using 

programming

 Each firm is compared to the fron

and assigned an efficiency score
DEA Production Fron

Firms inside frontier are less e

Input 2

Q

1

Input 
DEA Methods

Allow multiple inputs and multiple

DEA Methods

 Allow multiple inputs and multiple

outputs

 Can use input or output orientation Efficiency score can be a dependent Efficiency score can be

a dependent

variables in subsequent regression 

anal i ys

i

s

ӌ Case mix

, environment as 

independent variables
Limitations of DEA

 Assumes no measurement error or random  Sensitive to number of in

p p ut and out

put va

 Production frontier may be incomplete Measure of efficiency are relative to memb

Measure of efficiency are relative to memb

sample

 U f ffi i i i 

Use o

f effi

c

iency score 

in a regress

ion may 

statistical assumptions
 Allows for measurement error and ran

Stochastic frontier analysis (S

Allows for measurement error and ran

variation

 Statistical estimate of production func

cost function

 Interest is in the residuals E i d di “ d Error term is decomposed into “random 

noise” and “measure of inefficiency”
SFA M th d

C f ii

SFA

M

eth

o

d

s



Cost 

funct

ion 

is more common

 Cost is de

pendent variable

 Independent variables:

Input pricesOutputsProvider characteristics
SFA Methods (continu

 Must decide whether to use total cos

avera

ge cost

 Must choose functional form M di ib i f Must assume distribut

ion 

for error te
SFA Limitations

 Many inputs and outputs relative t

numb f b ti ber o

f o

bservations

 Results sensitive to assumptions a

Results sensitive to assumptions a

functional form, error term 

d iti d h i b t decomposition, an

d c

h

o

ice 

b

e

twee

and avera

ge cos

t
Stochastic Frontier Analysi

Stochastic Frontier Analysi

Envelo

p y e Anal

ysis

 SFA involves regression and analy

error 

term

 DEA uses linear programming, no

DEA uses linear programming, noparametric
SFA/DEA critique

 Lack of consideration of quality of produ

SFA/DEA critique

Lack of consideration of quality of produ

 Inadequate case-mix control N d f b bl i Nee

d

for strong 

but untestable assumpt

ion

 Too few observations requiring aggregati

inputs and outputs

--Newhouse J Health Econ 13:317-2
SFA/DEA critique

 Methods used by academic researche

not by providers or health plans

--Hussey et al 2
Case-Mix and Episod

Groupers
Cost per covered life

 Need to consider variations in sev

ill ( ness 

(case-mi ) x

)

 Ambulatory Care Groups/Diagnos

Ambulatory Care Groups/Diagnos

Care Groups

 Developed by Johns Hopkins Now a commercial product Now

a commercial product
Cost per episode 

 Claims data are grouped into episo Cost per episode compared
Commercial episode grou

– Ingenix “Episode Treatment Groups”– Thomson Reuters Thomson Reuters

“Medical Episode Gro

Medical Episode Gro

– Prometheus “Evidence Informed Case R– American Board of Medical Specialties 

Foundation

– NCQA “relative resource use”– Cave 

g p rou

p

e

r
Use of episode grouper

 Used by health plans to evaluate & 

reward id prov ers

 Medicare evaluation Medicare evaluation National Quality Forum evaluatio
Case-mix & Episode Group

mix & Episode Group

limitations 

 Lack of validation Attribution of care to a provider Concerns about consistency Concerns about consistency

See: Adams 
Use of efficiency measure

 Pro: can identify high cost provider Con: validity and consistency in evaluating 

Con: validity and consistency in evaluating 

 Con: lack of information on quality: is the h

provid i i th i ht t f ? ider g

i

v

ing the r

i

ght amoun

t o

f care

?

 Con: doesn’t tell the manager of high cost f

whih at pract

ices to c

hange
Small Area Variation 

Analysis
Small area variation

 Identifies rate that procedures/treatme

provided to eligible population provided to eligible population

 Compares geographic areas Great variation by area, with no differ

health

 Excess use considered inefficiency

See: Fisher & We
Ways to achieve hea

Ways to achieve hea

care efficiency care efficiency
Review of Cost Effectiveness Analysi

 Standard method for evaluating health care Standard method for evaluating health care

interventions

 Find incremental cost and outcomes relative 

Find incremental cost and outcomes relative 

standard care

 Outcomes expressed as quality adjusted life 

Outcomes expressed as quality adjusted life 

(morbidity adjusted survival)

 Estimates the cost per quality adjusted life y

Estimates the cost per quality adjusted life y

 Reject interventions that cost more than “thr

e g in U S those that cost more than e.g., in

U.S. those that cost more than

$100,000/QALY.
Use of Cost-Effectiveness An

 Can be used for coverage decisions, tr

guidelines

 Not widely used in U.S. More widely used in other countries

– National Institute on Clinical Effectivene

National Institute on Clinical Effectivene

advises National Health Service

– C di T h l A t (CAD

Canadian 

Tec

hno

logy 

Assessmen

t (CAD

Common Drug Review
Disinvestment to achieve effic

 Review existing care Identify targets for “disinvestment

– Care that is not cost Care that is not cost

-effective effective
“Do Not Use” List

 NICE mandate to identify interven

th t h ld t b d th

a

t s

hould no

t

be use

d
U S Efforts to identify ineffe

U

.

S. Efforts to identify ineffe

treatment

 Institute of Medicine  “Knowing what works in health c

roadmap for the nation roadmap for the nation

”
U S Efforts to identify ineffi

U

.

S. Efforts to identify ineffi

treatment

 National Priorities Partnership 200

( d b NQF) (convene

d

by NQF)

 Tufts Registry Tufts Registry Oregon Health Services Commiss New England Healthcare Institute
Disinvestment

 Pro: gives specific action that man

and id h ld t k d providers s

hould

t

a

k

e

 Con: hard to change practice Con: hard to change practice Con: each effort may have only a 

impac

t
Ethics and new 

appli i cat

ions
Ethical Consideration

 Application of CEA make assump

th t ll QALY h l l th

a

t all QALYs 

have equa

l va

lue

 Need to incorporate Need to incorporate

“public value

public value

applying CEA 

 NICE citizens’ council
Ethical Consideration

 Demonstration that random sampl

U S iti l CEA t h U.S. citizen can app

ly CEA

to 

hea

( ) Gold, 2007

)

 Ethical reason to support efficienc

Low-val hi h t i 

lue, hi

g

h cos

t serv

ices crow

s

p g endin

g on more efficient care
New applications for effici

New applications for effici

measures

 Used by health plans to evaluate & 

reward id prov ers

 Mandate for Medicare to evaluate Mandate for Medicare to evaluate

efficiency 

 National Quality Forum (NQF)

– call for measures on resource use call for measures on resource use
NQF consensus panel on NQF consensus panel on

“res

res

measures”

 Phase 1: call for measures Ph 2 tt ti t ifi di 

Phase 

2: attention 

to specific diseases. 

technical advisory panels on 18 condit

– CHF, CAD, AMC, Stroke/TIA, hyperten

diabetes, chronic kidne

y disease, asthma

– Cholecystitis/cholelithiasis, breast cancer

cancer, colorectal cancer, UTI, pneumoncancer, colorectal cancer, UTI, pneumon

fracture, osteoarthritis, spine/low back pa
References

Adams JL, Mehrotra A, Thomas JW, McGlynn EA. Physician cost 

reliability and risk of misclassification. N Engl J Med. 2010 Mar 

18;362(11):1014-21.

Fisher ES, Wennberg DE, Stukel TA, Gottlieb DJ, Lucas FL, Pinde

implications of regional variations in Medicare spending. Part 1quality, and accessibility of care. Ann Intern Med. 2003 Feb 18;

87.

Gold MR, Franks P, Siegelberg T, Sofaer S. Does providing cost-ef

information change coverage priorities for citizens acting as socmakers? Health Policy. 2007 Sep;83(1):65-72.

Hussey yg 

 PS, de Vries H, Romley J, Wang MC, Chen SS, Shekelle P

EA A systematic review of health care efficiency measures. Hea2009 Jun;44(3):784-805.

Newhouse JP. Frontier estimation: how useful a tool for health econ

Health Econ. 1994 Oct;13(3):317-22.