Reputational Incentives-How Improving Transparency Can Drive Hospital Competition

In 1209, when his soldiers were unable to distinguish the pious from the heretics, Arnaud Amalric ordered his men to “[k]ill them all [for] God will recognize his own!”¹ To many individuals living in the 21st century, Amalric’s indiscriminate use of blunt force to massacre 20,000 Cathari may seem like ancient history. However, in the world of healthcare Amalric’s words seem to have become the unofficial mantra of reformers. The US spends $2 trillion a year on healthcare, or $10,000 per capita, while 47 million Americans cannot afford healthcare insurance coverage.² Even before the current economic slump, the US could not afford its healthcare system. So, if the US is to remain competitive in a global economy, healthcare reform is no longer an issue; reform is coming and only the details remain to be resolved.

Unquestionably in the crosshairs of reformers is America’s over-consumption of healthcare services. According to 2006 World Health Organization (WHO) figures, the US spends more than twice as much per capita on healthcare as the UK or Japan.³ In particular, coronary interventions (coronary artery bypass grafting [CABG] or percutaneous coronary intervention [PCI]) are performed many times more frequently in the US than in Europe.⁴ The WHO’s data, which are corroborated by other reputable sources,⁵ suggest to healthcare reformers that coronary intervention is being over-prescribed in the US. However, lacking clinical acumen, reformers are hard-pressed to identify which patients could be managed medically and which require more invasive intervention.

Enter provider-specific report cards, a methodology ostensibly designed to improve patients’ autonomy by increasing market transparency.⁶ Recently, the Centers for Medicare and Medicaid Services (CMS) launched its own report card on its Hospital Compare website.⁷ Already receiving 2.5 million hits per month, Hospital Compare ranks private hospitals according to performance measures, reimbursement, and risk-adjusted mortality.⁸ On the other hand, the realpolitik of provider-specific report cards (including Hospital Compare) is to enlist the aid of market forces⁹ to ration healthcare.¹⁰ More specifically, report cards use proxies (e.g. surgical-site infection [SSI] rate) to measure ‘quality,’ and an adverse report card can ruin a hospital’s reputation. To reformers, fewer hospitals means fewer services will be provided. However, the rather blunt nature of these quality proxies ensures that any reward or punishment a hospital receives based on its report card performance will be granted more or less indiscriminately.