The changing distribution of a major surgical procedure across hospitals: were supply shifts and disequilibrium important?

This paper describes and analyzes the changing distribution across hospitals in the U.S. of total hip replacement surgery (THR) for the period 1980-1987. THR is one of the most costly single procedures contributing to health care expenses. Also, the use of THR exhibits a particularly high degree of geographic variation. Recent research pointed to shifts in demand as one plausible economic explanation for increasing use of THR. This paper questions whether shifts in supply may have been large enough to explain changes in patient mix and the relationship of patient mix to the number of procedures performed at a particular hospital. In addition, the relationship between total use of THR and the local availability of orthopaedic surgeons as well as the average allowable Medicare fee for standardized physician services is analyzed. These relationships might yield evidence to support a scenario of induced demand beyond the optimum for patients' welfare, or evidence of supply increase within a disequilibrium scenario. This study, using data for all THR patients in a large sample of hospitals, tends to reject the formulation of a market with independent supply and demand shifts where the supply shifts were the dominant forces. Hospitals with a larger number of THRs performed did not see a higher percentage of older, sicker, and lower income patients. It was more likely that demand shifts generated increases in capacity for surgical services. Moreover, there was little evidence for a persistent disequilibrium and only weak evidence for inducement. Also, we found little evidence that hospitals responded to financial incentives inherent in the Medicare payment system after 1983 to select among THR candidates in favour of those with below average expected cost. We did observe increased concentration over time of THR procedures in facilities with high volume--suggesting plausible demand shifts towards hospitals with a priori quality and cost advantages or who obtained those advantages with a high volume of patients.