Does Underuse Variation in Test-Ordering Practice Relate to Higher Care-Delivery Cost?

Recent studies estimate that a significant portion, approximately 25%, of total healthcare spending in the U.S. is waste, ranging from $690 billion to $935 billion every year. Naturally, there has been a sustained call for efforts to reduce such waste of healthcare resources. This study aims to empirically investigate how unwarranted clinical practice variation in healthcare relates to hospital resource usage. Existing literature classifies healthcare variations into warranted and unwarranted. Unwarranted variation can result from variation in care providers’ decisions, variation to customize care, or variation in medical procedure supplies. We use the term practice variation to refer to the overall contribution of these three unwarranted variation facets. Specifically, we posit that hospitals with a higher underuse practice variation in test-ordering (e.g., radiology and laboratory tests) may face unexpected higher expenditures in subsequent care-delivery stages. The high underuse practice variation in test-ordering implies that a hospital is more likely to fail to order proper tests for some patients. Thus, such a hospital may spend extra efforts in care-delivery stages to alleviate potential adverse effects of the test underuse. For example, diagnosis errors may lead to incorrect treatment, delayed treatment, or no treatment, and a patient’s condition can be made even worse. We conjecture that higher underuse practice variation in test-ordering can result in lower average test-ordering cost, yet worse system-wide resource usage, i.e., higher care-delivery cost. We also consider the intervening effects of two quality initiatives on the relationship: process quality (i.e., how well a hospital adheres to evidence-based medical guidelines to diagnose and treat patients) and experiential quality (i.e., external perceptions of care quality from a patient’s perspective). We first propose a stepwise approach to measure practice variation defined as all variation not resulting from the patient-mix. To separate measures for underuse and overuse variation in test-ordering practice, we adopt a concept from Finance called target semi-deviation that is computed in a similar way to a standard deviation but only on a single side of a target mean. While we use the within-hospital average as a base target mean, we also use county-average and state-average as different targets as robustness checks. To account for the dynamic endogeneity of practice variation and resource usage in testing our hypotheses, we use a dynamic panel model with System Generalized Method of Moments (GMM) as an estimation strategy. We find that higher underuse variation in the test-ordering lead to higher care-delivery cost. Interestingly, this phenomenon is even stronger when a hospital provides a higher-quality patient experience because such a hospital tends to provide more responsive care, which is often resource-intensive. Therefore, hospitals may be improperly rewarded for quality improvements if practice variation is ignored, implying that incentives and penalties for hospital operations should be designed to account for such effects. We discuss our findings and policy implications based on a comprehensive six-year inpatient data from New York and Florida states.