Sources of Inefficiency in Healthcare and Education.

the article page for additional materials and author disclosure statement(s). Healthcare and education share commonalities in mission, financing, and empirical regularities. Both are central to allowing people to perform at their capabilities. Both are often provided by, or subsidized by, government. Heterogeneity— the idea that interventions such as AP classes or bypass surgery may have different effects depending on the characteristics of the recipient and the supplier—is another shared feature of many treatments in education and healthcare. Importantly for this paper, both sectors exhibit wide variation in spending that is loosely associated with outcomes. There are three reasons for this apparent lack of association: (i) confound-ing—the sorting of students and patients to particular educators or providers in ways that cause nonexperimental measurement of value added to be biased upward or downward; (ii) overuse and underuse—the idea that some schools, hospitals, teachers, or physicians may be doing too much or too little; or (iii) comparative advantage—that some schools or hospitals are better than others in delivering certain types of education or health-care and so should be delivering more. The last two explanations are related to productivity differences across suppliers, while the first, confounding , is a demand-side phenomenon. In this paper, we summarize one approach for understanding productivity differences across providers in healthcare and discuss how it can, and cannot, be applied to education. We ignore the role of confounding, which are student-level confounders in education and patient-level confounders in healthcare, not because this is unimportant but because of an appreciation for the considerable progress that has been made in overcoming this challenge (Chetty, Friedman, and Rockoff 2014; Doyle et al. 2016). Rather, we focus on understanding the economic content of variation in risk-adjusted treatment rates or spending. These could arise from two very different mechanisms on the supply side. One interpretation argues that there is a correct amount of use that is the same for everyone, so that variation across providers or educators is evidence of allocative inefficiency—some are using too much care and others are using too little. This would happen if there was overuse at hospitals, possibly because such hospitals were overconfident about the benefit of treatment, or because they were maximizing something other than health. This interpretation of variation leads to an emphasis on guidelines and developing and disseminating information on cost-effectiveness of care. An alternative interpretation is that the return to medical care varies across providers, …