Nber Working Paper Series Identifying Sources of Inefficiency in Health Care

In medicine, the reasons for variation in treatment rates across hospitals serving similar patients are not well understood. Some interpret this variation as unwarranted, and push standardization of care as a way of reducing allocative inefficiency. However, an alternative interpretation is that hospitals with greater expertise in a treatment use it more because of their comparative advantage, suggesting that standardization is misguided. We develop a simple economic model that provides an empirical framework to separate these explanations. Estimating this model with data on treatments for heart attack patients, we find evidence of substantial variation across hospitals in both allocative inefficiency and comparative advantage, with most hospitals overusing treatment in part because of incorrect beliefs about their comparative advantage. A stylized welfarecalculation suggests that eliminating allocative inefficiency would increase the total benefits from this treatment by about a third. Amitabh Chandra John F. Kennedy School of Government Harvard University 79 JFK Street Cambridge, MA 02138 and NBER [email protected] Douglas O. Staiger Dartmouth College Department of Economics HB6106, 301 Rockefeller Hall Hanover, NH 03755-3514 and NBER [email protected]