Do All Roads Lead to Rome? Exploring the Appropriateness and Consistency of Outcome-based Indicators for Ranking Hospital Quality

Outcome-based measures, such as mortality and readmission rates, are often interpreted as good indicators of the unobservable hospital quality and, thus, increasingly adopted as a basis for providing financial incentives to hospitals. In this chapter, preliminarily we examine risk-adjusted mortality and readmission rates for three specific medical procedures (CHF, COPD, STROKE) in both the US Medicare-certified hospitals and Italian hospitals and, in contrast to the conventional wisdom, we show that the two outcome measures tell two completely different stories in terms of hospitals’ performance. Then, moving from this evidence, we study a model of hospitals’ behaviour where patients differ in their idiosyncratic risk and, importantly, we consider explicitly the generating process of standard outcome-based indicators. We find that, when adjustment for the idiosyncratic risk is not fully appropriately made, readmission rates are worse indicators of hospital quality than mortality rates, and their use in performance programmes might penalize the best hospitals. Moreover, we find that the higher is the probability of mortality for the specific medical intervention, the lower is the reliability of readmission rates as indicators of quality. Therefore, our results emphasize that the use of readmission rates as a basis for performance programmes should be set more appropriately.