Why Is There a Quality Chasm?

Joseph P. Newhouse


Health Affairs. 2002;21(4) 

In This Article

Abstract and Introduction

Medical care seems to obtain less value from the resources it uses than other industries do, a phenomenon not limited to the United States. I explore several reasons for this, including consumers' ignorance, the rate of technological change, the widespread use of administered pricing, the difficulty of appraising a given provider's quality, and the role of the public sector with objectives other than efficiency. Although these causes suggest that the performance of medical care may always lag behind that of other industries, greater use of information technology and improved financial incentives will help to reduce the size of the quality chasm.

If one waked a typical professional economist in the middle of the night and asked whether industries generally produce at something approximating minimum cost, most would probably answer yes. If the industry is competitive, standard starting assumption, high-cost firms will be driven from the market. Even if the market is not competitive, firm can always increase profits by reducing its costs.[1] And when managers in noncompetitive industry seek to lead the quiet or high life rather than relentlessly decreasing costs, their firm may face new entrants or a takeover attempt.

Economists -- and noneconomists as well -- also assume that if better mouse-trap is built, consumers will stop buying the old one unless the additional price for the new one is unjustified. Products whose quality is not worth their price go the way of Soviet-era automobiles in the post-Soviet era. This is simply an extension of the standard competitive assumption into competition among products. In short, the competitive assumption, whether with respect to price or product, is one of the pillars upon which economists build their belief that most industries, most of the time, get as much as they can for the quantity and quality of inputs that they use.

Because of the pervasiveness with which competition winnows out firms whose products do not justify their price, economists have devoted only modest efforts to quantifying the degree to which industries and firms do not get as much as possible from the resources they employ.[2] By contrast, much more of the health services research literature has gone into documenting the shortcomings of the medical care industry in producing health. The well-known recent report from the Institute of Medicine (IOM) termed the gap between the actual and potential performance of the U.S. health care system "quality chasm."[3] I believe that most economists would not describe most industries in this fashion. That judgment may be wrong, but for this paper I assume that medical care is inefficient and that it fails to produce as much health as it might with the resources it uses, and I ask why.

One can raise two immediate and related important questions about this indictment of medical care. First, perhaps health is the wrong output. One could ask only whether physicians and hospitals are efficient at producing narrowly defined medical services such as office visits and hospital stays rather than health. For example, the efficiency of computer makers is judged by how cheaply they make computers of varying power; one usually does not ask whether users need the additional power. But if one assumes that consumers who choose to pay more for more powerful computer value the additional cap city more than its cost, the relevant issue is whether the computer was made in least-cost fashion. Because of the consumer's ignorance and the resulting agency relationship with physicians, as well as widespread insurance coverage, the same deference is not as readily given to consumers' preferences in medical care.

Second, one may grant that medical care is not performing well, but is it really performing markedly worse than other industries perform? Although high rates of negligent error and repeated tests, as well as long waiting times, paint picture of poor performance, they scarcely constitute summary measure of efficiency, let alone measure that can be compared against other industries.[4]

Finding measures with which to compare the efficiency of industries is difficult. Comparisons are somewhat easier if medical care services rather than health are the relevant outputs. Then one might employ variant on the notion of best practice: Ascertain the quantity of output (for example, hospital stays) cross various firms and the quantity of inputs each firm uses, and determine how much more could be produced from the same total inputs if all firms produced at the level of the best-performing firms. Then determine if medical care in the aggregate falls short of best practice by more than other industries do. But such comparisons require accounting for differences in the quality of different firms' output and inputs, hard task.[5] Further, the market for most medical services is local; inherent differences in scale and modes of treatment complicate comparing the efficiency of small rural hospital with that of large teaching hospital, not to mention solo general practitioner with subspecialist in large group.

If health rather than medical services is the output, problems are magnified. Health cannot be measured in units that are commensurate with outputs of other industries. And one wants to know the value added of medical care, something not likely to be known with much precision.

Despite the lack of summary measure of its efficiency, many seem convinced that the medical industry's performance falls short. I begin by briefly reviewing some of the better-known evidence supporting this conviction. I then turn to my main purpose, explaining this poor performance. The explanations I discuss seem largely inherent in the delivery of medical services, which implies that substantial improvement will not be easily achieved.


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