Determinants of Low-Cost Provider Use: Evidence From Lab Tests

Abstract

This article studies the determinants and consequences of low-cost provider use for lab tests. Using all-payer claims data, I measure price variation across lab providers and link individual tests to referring providers, primary care providers, and clinician-hospital ownership information. I find that independent labs are 70% to 80% less expensive than hospital-based facilities, highlighting a path for considerable potential savings. Referring providers are overwhelmingly the strongest determinant of per-lab spending and hospital-based use, explaining 73% of the explained variance in site of care. Switching from a bottom-quintile independent-lab referrer to one in the top quintile is associated with a 39% drop in spending per test. Vertically integrated providers are less likely to be associated with independent lab use and are instead associated with higher spending per test. These findings suggest that clinician relationships, referral dynamics, and vertical integration are critical determinants of spending and site of care.