How Costly is Hospital Quality? A Revealed-Preference Approach


  • We wish to thank Daniel Ackerberg, David Balan, Steven Garber, Eric Helland, Mireille Jacobson, Raphael Thomadsen, Robert Town, William Vogt, the Editor and two anonymous referees for helpful comments. John Romley also thanks Frank Wolak, Peter Reiss and Jonathan Levin for their advice. This research was supported by the National Institute on Aging (P30AG024968 and 1R03AG031990) and the Bing Center for Health Economics.


We analyze the cost of quality improvement in hospitals, dealing with two challenges. Hospital quality is multidimensional and hard to measure, while unobserved productivity may influence quality supply. We infer the quality of hospitals in Los Angeles from patient choices. We then incorporate ‘revealed quality’ into a cost function, instrumenting with hospital demand. We find that revealed quality differentiates hospitals, but is not strongly correlated with clinical quality. Revealed quality is quite costly, and tends to increase with hospital productivity. Thus, non-clinical aspects of the hospital experience (perhaps including patient amenities) play important roles in hospital demand, competition, and costs.