The Social and Policy Implications of Volume-Based Referral:
Empirical research on the effect of volume-based referral on the price of surgery indicates that volume-based referral should decrease the price of surgery. This is most likely due to lower costs of surgery for high volume hospitals due to economies of scale. It is possible that if volume-based referral were sufficiently implemented to the point where many high volume hospitals gained local monopoly power, the price of surgery could increase, offsetting or reversing the decreased prices observed in the studies. In the case where monopoly power leads to the increased price of surgery, there will be welfare loss from economic distortions due to changes in the allocation of resources.Volume-based referral increases welfare in several ways. The decreased costs of surgery itself, along with fewer costly complications and shorter length of stay, all cause welfare gains. Far and away the most important welfare increase comes as a result of the decreased mortality rates at high volume hospitals. Dudley et al. (2000) estimate that 602 lives could be saved annually by referring surgery patients for 11 procedures from low volume hospitals to high volume hospitals. The U.S. Department of Transportation estimates the benefit of "averting an accidental fatality" is $3.0 million2 (Van Tine, 2002). If 602 lives are saved annually at a value of $3.0 million a life, this is a savings of $1.8 billion annually. This number is certainly a high estimate for the value of life. This value of life estimate is based on healthy years of life, a criterion that does not hold for many surgery patients. Birkmeyer et al. (2002b) report a potential savings of $1 billion annually, which might be a better estimate. Regardless of the exact figure which is difficult to estimate, the potential savings from volume-based referral is still staggering.
When considering if a policy of volume-based referral is efficient for the United States, it is important to weigh the welfare gains against the welfare losses from economic distortions of the allocation of resources. Volume is targeted because it has been shown to have a relationship with improved quality. There is nothing intrinsically valuable about volume, however. Thus, if a different policy could achieve the same quality results without the costs of volume-based referral, the alternate policy is superior. However, at this time, alternate measures of quality are harder to come by. Volume is a statistic readily available to patients and referring physicians. Thus at this time, a policy of volume-based referral is the best option available. It is important to continue to monitor the policy and watch for deleterious economic effects, such as economic distortions resulting from monopolistic high volume hospitals. If these effects are observed, policies to control hospitals should be developed, or the policy of volume-based referral should be abandoned altogether if the welfare losses outweigh the welfare gains.
Be Sure to Continue to Page 5 of "The Quality and Economic Implications of Volume-Based Surgery Referral".
