Lecture 14A
Health care market → no other market of substantial importance violates the
requirements of perfect competition so radically.
Hospital competition & quality:
● Markets with regulated prices
○ Prices are fixed so hospitals compete on quality only.
○ Competition → quality improvement
■ That is, if price > marginal costs.
● Markets were hospital set price & quality
○ Competition → ambiguous effects on quality
■ Depends on price elasticity of demand versus the quality elasticity of
demand.
● More sensitive to lower prices than higher quality →
lower price and lower quality
● More sensitive to quality instead of prices →
competition can have a positive effect on quality
Impact hospital competition → empirical evidence:
● Two approaches:
○ SCP → structure conduct performance
■
○ Event study/DiD (differences in differences) (better method)
■
● Results of competition substantially differ over time and by market, country and policy
design.
● Even when the same type of competition is used, such as direct competition among
hospitals through patient choice, minor differences in institutional context and market
characteristics can lead to very different outcomes.
● Overall, the impact of hospital competition on prices, costs & quality of care crucially
depends on the ‘rules of the game’.
○ The devil is in the detail
, ○ Measured vs unmeasured quality
Medical Arms Race (MAR)
● Problematic cocktail in US hospital markets 1960s - mid 1980s
○ Generous insurance
○ Full hospital costs reimbursed retrospectively
● → Unnecessarily duplication of expensive capital equipment and
unnecessary expenditures on advertising.
MAR → hospital competition is not socially beneficial.
● If the additional intensity of medical care resulting from competition is excessive, in
terms of improvements in patiënt health outcomes, whose value is less than the
social costs of production, then competition among hospitals would be socially
wasteful.
● Most of the models of how hospital competition may reduce social welfare focus on
distorted price signals and a more general absence of price competition.
Empirical evidence → lessons from the UK:
● The survey suggests that the pro-competitive policies undertaken by the UK
government and implemented in England have broadly had a positive effect. More
generally, although not without some problems, the policy was relatively well crafted
to address problems in health care service markets. Learning from earlier changes of
the 1990s, the funding model was changed to a prospective case based funding
model, meaning that competition, if it occured, would not be on price.
● Including policies to create & support patient choice
Lecture 14B
Patient choice is only relevant when it is accompanied by the publication of quality
information.
Patiënt hospital choice & hospital competition:
● Competition-based health care reforms
○ Increase efficiency by stimulating provider competition
Health care market → no other market of substantial importance violates the
requirements of perfect competition so radically.
Hospital competition & quality:
● Markets with regulated prices
○ Prices are fixed so hospitals compete on quality only.
○ Competition → quality improvement
■ That is, if price > marginal costs.
● Markets were hospital set price & quality
○ Competition → ambiguous effects on quality
■ Depends on price elasticity of demand versus the quality elasticity of
demand.
● More sensitive to lower prices than higher quality →
lower price and lower quality
● More sensitive to quality instead of prices →
competition can have a positive effect on quality
Impact hospital competition → empirical evidence:
● Two approaches:
○ SCP → structure conduct performance
■
○ Event study/DiD (differences in differences) (better method)
■
● Results of competition substantially differ over time and by market, country and policy
design.
● Even when the same type of competition is used, such as direct competition among
hospitals through patient choice, minor differences in institutional context and market
characteristics can lead to very different outcomes.
● Overall, the impact of hospital competition on prices, costs & quality of care crucially
depends on the ‘rules of the game’.
○ The devil is in the detail
, ○ Measured vs unmeasured quality
Medical Arms Race (MAR)
● Problematic cocktail in US hospital markets 1960s - mid 1980s
○ Generous insurance
○ Full hospital costs reimbursed retrospectively
● → Unnecessarily duplication of expensive capital equipment and
unnecessary expenditures on advertising.
MAR → hospital competition is not socially beneficial.
● If the additional intensity of medical care resulting from competition is excessive, in
terms of improvements in patiënt health outcomes, whose value is less than the
social costs of production, then competition among hospitals would be socially
wasteful.
● Most of the models of how hospital competition may reduce social welfare focus on
distorted price signals and a more general absence of price competition.
Empirical evidence → lessons from the UK:
● The survey suggests that the pro-competitive policies undertaken by the UK
government and implemented in England have broadly had a positive effect. More
generally, although not without some problems, the policy was relatively well crafted
to address problems in health care service markets. Learning from earlier changes of
the 1990s, the funding model was changed to a prospective case based funding
model, meaning that competition, if it occured, would not be on price.
● Including policies to create & support patient choice
Lecture 14B
Patient choice is only relevant when it is accompanied by the publication of quality
information.
Patiënt hospital choice & hospital competition:
● Competition-based health care reforms
○ Increase efficiency by stimulating provider competition
