COMPETITION IN HEALTHCARE MARKETS
Meeting 1. The Industrial Organization of Health care markets
Competition in health care is fiercely debated.
Competition has become the pariah of health care concepts. In health care, competition is
an easy scapegoat. It is however too easy to just get rid of competition. In the health care
sector, we need a combination of market incentives and government regulation.
Industrial organization: a short introduction
To study industrial organization is to study the functioning of markets, a central concept in
microeconomics.
No other market of substantial importance violates the requirements of perfect
competition so radically.
Requirements for perfect competition:
Standardized products
Price-taking behavior
Free entry & exit
Perfect information
Government regulation is required, but just like markets, governments are also far from
imperfect. Improving the functioning of health care markets is all about: how to navigate
between market failure and government failure?
There is growing interest among economics in recent years in the industrial organization of
health care markets. Due to the growing prominence f health care markets in policy issues,
increasing availability of rich datasets on health care, advances in economics methodology,
institutional changes that have led to a greater role and prominence for markets in health
care.
Gaynor et al. (2015), multistage model. 5 stages
1. Quality determination in provider markets
2. Price and network determination in provider markets
3. Premium determination in insurance markets
4. Consumers choice in insurance markets
, 5. Incentives and provider referral decision/ consumers utilization.
Each of these 5 stages has impact on equilibrium outcome and welfare.
The stages are also related. Optimal choices in one stage are functions of expectations
regarding the rest.
1. Quality determination in provider markets.
Hospital competition and quality theory:
What mechanism could explain that hospital competition affects quality?
o Strategic choice for lower quality is unlikely.
o More likely: lower effort in more concentrated hospital markets.
- Quality is increasing in price, the elasticity of demand with respect to quality, and the
firm’s -total demand.
- Quality is decreasing in the marginal costs of quantity or quality.
- Quality will increase if the quality elasticity of demand increases or price elasticity of
demand declines.
- Quality will also increase if price increases relative to the marginal costs of quality.
There are two types of empirics: SCP, DiD / Event Study
Quality measures are confined to patient mortality. It will be important to employ other
measures in order to obtain a more complete picture of the impacts of competition on
health care quality.
Mandatory literature.
Gaynor et al. (2015), the industrial organization of health-care markets.
In US, healthcare spending is up to 185 of GDP.
Five stage model:
o 1. Quality determination in provider markets
, Hospitals and physicians make investments that determine
their quality.
Such as information on quality and choices offered.
o 2. Price and network determination in provider markets
Providers negotiate with insurers to determine insurers’
provider and the prices paid to the providers.
o 3. Premium determination in insurance markets
Insurers choose premium to maximize their objective functions
o 4. Consumer choice in insurance markets
After negotiations.
o 5. Incentives and provider referral decisions/ consumer utilization:
People get sick and utilize providers either from within their
insurers networks or from outside the network.
The article begins by discussing the unique characteristics of healthcare markets, including
the presence of both insurance and provider markets, the high degree of regulation, and the
complexity of healthcare services. The authors then explore how market structure affects
the behavior of healthcare providers and insurers.
The authors use economic theory and empirical evidence to illustrate how different market
structures can impact healthcare outcomes. They discuss how competition, both between
providers and insurers, can lead to greater efficiency and lower costs. However, they also
note that certain market characteristics, such as high fixed costs and the importance of
reputation, can limit competition in healthcare markets.
The article concludes by discussing the policy implications of their findings. The authors
argue that policymakers should focus on promoting competition in healthcare markets by
reducing barriers to entry, encouraging price transparency, and promoting innovation. They
also highlight the importance of balancing competition with regulation to ensure quality and
access to care.
Does price deregulation in a competitive hospital market damage quality? Roos et al. (2020).
Roos et al. (2020) conducted a study on the impact of price deregulation in a competitive
hospital market on the quality of healthcare services. The authors examined the case of the
Dutch hospital market, which underwent significant price deregulation in 2005.
The authors found that price deregulation did not have a significant impact on overall
healthcare quality. However, they did find that hospitals that faced more competition in the
post-deregulation period had higher mortality rates for certain conditions, such as acute
myocardial infarction and stroke.
The authors suggest that the increase in mortality rates in more competitive hospitals may
be due to a focus on cost-cutting rather than quality improvement in the face of price
competition. They also note that the impact of price deregulation on quality may vary
depending on the specific market and regulatory context.
, Overall, the study suggests that price deregulation in a competitive hospital market may not
necessarily damage healthcare quality overall, but it may have differential effects on quality
depending on the level of competition and other contextual factors.
Meeting 2. Physician treatment & referral decisions and price transparency
Stage 5. Incentives and provider referral decisions/ consumer utilization.
Physician treatment and referral decisions. Impact of physician incentives on treatment
decisions.
Possible consequences when physicians receive higher prices for their treatments
Physicians receive more income
Higher intensity of services and improves patients’ health
Quicker diffusion of new technology
What do empirical studies find?
Do physicians’ financial incentives affect treatment and patient health?
o Estimate the effect of the price shock on
Care provision
The utilization of advanced technologies
Patient health outcomes
Meeting 1. The Industrial Organization of Health care markets
Competition in health care is fiercely debated.
Competition has become the pariah of health care concepts. In health care, competition is
an easy scapegoat. It is however too easy to just get rid of competition. In the health care
sector, we need a combination of market incentives and government regulation.
Industrial organization: a short introduction
To study industrial organization is to study the functioning of markets, a central concept in
microeconomics.
No other market of substantial importance violates the requirements of perfect
competition so radically.
Requirements for perfect competition:
Standardized products
Price-taking behavior
Free entry & exit
Perfect information
Government regulation is required, but just like markets, governments are also far from
imperfect. Improving the functioning of health care markets is all about: how to navigate
between market failure and government failure?
There is growing interest among economics in recent years in the industrial organization of
health care markets. Due to the growing prominence f health care markets in policy issues,
increasing availability of rich datasets on health care, advances in economics methodology,
institutional changes that have led to a greater role and prominence for markets in health
care.
Gaynor et al. (2015), multistage model. 5 stages
1. Quality determination in provider markets
2. Price and network determination in provider markets
3. Premium determination in insurance markets
4. Consumers choice in insurance markets
, 5. Incentives and provider referral decision/ consumers utilization.
Each of these 5 stages has impact on equilibrium outcome and welfare.
The stages are also related. Optimal choices in one stage are functions of expectations
regarding the rest.
1. Quality determination in provider markets.
Hospital competition and quality theory:
What mechanism could explain that hospital competition affects quality?
o Strategic choice for lower quality is unlikely.
o More likely: lower effort in more concentrated hospital markets.
- Quality is increasing in price, the elasticity of demand with respect to quality, and the
firm’s -total demand.
- Quality is decreasing in the marginal costs of quantity or quality.
- Quality will increase if the quality elasticity of demand increases or price elasticity of
demand declines.
- Quality will also increase if price increases relative to the marginal costs of quality.
There are two types of empirics: SCP, DiD / Event Study
Quality measures are confined to patient mortality. It will be important to employ other
measures in order to obtain a more complete picture of the impacts of competition on
health care quality.
Mandatory literature.
Gaynor et al. (2015), the industrial organization of health-care markets.
In US, healthcare spending is up to 185 of GDP.
Five stage model:
o 1. Quality determination in provider markets
, Hospitals and physicians make investments that determine
their quality.
Such as information on quality and choices offered.
o 2. Price and network determination in provider markets
Providers negotiate with insurers to determine insurers’
provider and the prices paid to the providers.
o 3. Premium determination in insurance markets
Insurers choose premium to maximize their objective functions
o 4. Consumer choice in insurance markets
After negotiations.
o 5. Incentives and provider referral decisions/ consumer utilization:
People get sick and utilize providers either from within their
insurers networks or from outside the network.
The article begins by discussing the unique characteristics of healthcare markets, including
the presence of both insurance and provider markets, the high degree of regulation, and the
complexity of healthcare services. The authors then explore how market structure affects
the behavior of healthcare providers and insurers.
The authors use economic theory and empirical evidence to illustrate how different market
structures can impact healthcare outcomes. They discuss how competition, both between
providers and insurers, can lead to greater efficiency and lower costs. However, they also
note that certain market characteristics, such as high fixed costs and the importance of
reputation, can limit competition in healthcare markets.
The article concludes by discussing the policy implications of their findings. The authors
argue that policymakers should focus on promoting competition in healthcare markets by
reducing barriers to entry, encouraging price transparency, and promoting innovation. They
also highlight the importance of balancing competition with regulation to ensure quality and
access to care.
Does price deregulation in a competitive hospital market damage quality? Roos et al. (2020).
Roos et al. (2020) conducted a study on the impact of price deregulation in a competitive
hospital market on the quality of healthcare services. The authors examined the case of the
Dutch hospital market, which underwent significant price deregulation in 2005.
The authors found that price deregulation did not have a significant impact on overall
healthcare quality. However, they did find that hospitals that faced more competition in the
post-deregulation period had higher mortality rates for certain conditions, such as acute
myocardial infarction and stroke.
The authors suggest that the increase in mortality rates in more competitive hospitals may
be due to a focus on cost-cutting rather than quality improvement in the face of price
competition. They also note that the impact of price deregulation on quality may vary
depending on the specific market and regulatory context.
, Overall, the study suggests that price deregulation in a competitive hospital market may not
necessarily damage healthcare quality overall, but it may have differential effects on quality
depending on the level of competition and other contextual factors.
Meeting 2. Physician treatment & referral decisions and price transparency
Stage 5. Incentives and provider referral decisions/ consumer utilization.
Physician treatment and referral decisions. Impact of physician incentives on treatment
decisions.
Possible consequences when physicians receive higher prices for their treatments
Physicians receive more income
Higher intensity of services and improves patients’ health
Quicker diffusion of new technology
What do empirical studies find?
Do physicians’ financial incentives affect treatment and patient health?
o Estimate the effect of the price shock on
Care provision
The utilization of advanced technologies
Patient health outcomes
