Too much ado about instrumental variable approach: is the cure worse than the disease?

To review the efficacy of instrumental variable (IV) models in addressing a variety of assumption violations to ensure standard ordinary least squares (OLS) estimates are consistent. IV models gained popularity in outcomes research because of their ability to consistently estimate the average causal effects even in the presence of unmeasured confounding. However, in order for this consistent estimation to be achieved, several conditions must hold. In this article, we provide an overview of the IV approach, examine possible tests to check the prerequisite conditions, and illustrate how weak instruments may produce inconsistent and inefficient results.

We use two IVs and apply Shea's partial R-square method, the Anderson canonical correlation, and Cragg-Donald tests to check for weak instruments. Hall-Peixe tests are applied to see if any of these instruments are redundant in the analysis.

A total of 14,952 asthma patients from the MarketScan Commercial Claims and Encounters Database were examined in this study. Patient health care was provided under a variety of fee-for-service, fully capitated, and partially capitated health plans, including preferred provider organizations, point of service plans, indemnity plans, and health maintenance organizations. We used controller-reliever copay ratio and physician practice/prescribing patterns as an instrument. We demonstrated that the former was a weak and redundant instrument producing inconsistent and inefficient estimates of the effect of treatment. The results were worse than the results from standard regression analysis.

Despite the obvious benefit of IV models, the method should not be used blindly. Several strong conditions are required for these models to work, and each of them should be tested. Otherwise, bias and precision of the results will be statistically worse than the results achieved by simply using standard OLS.