Lectures summary
M1: The industrial organization of health care markets
Outline for functioning and performance of healthcare markets
- Network formation
- Price negotiation
- Insurer premium setting
- Health plan choice
- Physician treatment, referral decisions & private investor ownership
- Price transparency
Competition policy
- Theory & practice of competition law
- No horizontal merger control
- Hospital merger control
- Retrospective merger analysis
- Ex ante merger simulation
- Special topic; pricing in oncology
Industrial organization
External organization for firms where they need to operate
- Study for the Functioning of markets (analysis of market power and
regulation)
- Behavior of firms (GP, pharmacy, health insurers) following all kinds
of incentive given by the industrial organization
Perfect competition
- Perfect information not asymmetrical
- Unlimited suppliers and buyers (no market power)
- Homogenous products
- Easy to enter the market
Perfect from the societal perspective (buy anything you need etc.), market
not has to worry
Requirements for perfect competition and violation
1. Standardized (homogenous products)
o Violated – differences in quality (hospitals for example)
2. Price taking behavior
o Patents and monopolies
o Big buyers (large insurers)
, 3. Free entry and exit
o Entry not easy, think of doctors
o Hospitals huge investments
4. Perfect information
o Biggest problem
o Agent principal problem
Government regulation is required but,
- Just rely on government regulation and rule out incentives?
o Overlooking government failure
Government also suffers from information problems, self-interest
(politicians in short term solutions than long term)
Question: how to navigate between market failure (use regulation) and
government failure (use incentives)
Gaynor et al. - The industrial organization of healthcare markets
Growing prominence of healthcare markets
- Increasing availability of rich datasets
- Advances in economics methodology
- Institutional chances
The multistage model – 5 stages impact the outcomes of markets and
welfare
1. Quality determination in provider markets
2. Price and network determination in provider markets
3. Premium determination in insurance markets
4. Consumer choice in insurance markets (2-sided market health
insurers and providers)
5. Incentives and provider referral desicions/consumer utilization
optimal choices in one stage are functions of expectations regarding the
rest…
,Quality determination in provider markets
- Hospital related mortality -> bad outcome quality measures
What mechanism should affect quality?
- Strategic selection of patients
- Hospital standardized mortality rate (correction)
Strategic choice for lower quality is unlikely
More likely lower effort in more concentrated hospital markets
- Fewer providers: less extrinsic incentives to undertake efforts, as
patients will be there anyway
Lower concentrated market (strong competition) lead to lower quality
- Competition based on price cost cuts lowers quality
2 different types of market
- Markets with regulated prices
o Marginal costs are below regulated price increase quality
o Quality is increasing in price, the elasticity of demand with
respect to quality and the firms total demand
o Quality is decreasing in the marginal costs of quantity or
quality
- zej = eq. quality hopital j
- p = regulated price
- cq & cz = mc of quantity & quality
- sj = market share hospital j
- D = total market demand
- Markets were can set price and quality
o Strategic decision making focus on prices (to gain market
share) or quality improvements to attract more patients
o Dorfman-Steiner condition
Quality will increase if the quality elasticity of demand
increase or the price of elasticity of demand declines
(vice versa)
Quality will also increase if price increases relative to the
marginal costs of quality (and fall if the opposite
happens)
, - Quality elasticity (quality sensitive) more likely to increase quality
- Price elasticity (price sensitive, insurers) more likely to lower
quality
- z = quality
- p = price
- d = mc of quality
- z = quality elasticity of demand
- p = price elasticity of demand
Hospital competition and approaches to assess quality
Two approaches:
1. SCP
- Stucture -conduct - performance paradigm
- Estimate the relation between market structure and conduct
hospital in that market
Leads to a certain performance, prices, quality costs
Linear relation between market conduct and
performance
- Structure assessment through HHI
- If a market has four firms with market shares of 30%, 30%, 20%,
and 20%, the HHI is: 302 +302 +202 +202 =900+900+ 400+400=2,600
(High Concentration).
- Cross sectional data -> difficult to real causal relationship, only a
prediction
- Price as relation between cost shifters and market costs
Not a direct one-way relationship
Other factors that impact the conduct than structure
M1: The industrial organization of health care markets
Outline for functioning and performance of healthcare markets
- Network formation
- Price negotiation
- Insurer premium setting
- Health plan choice
- Physician treatment, referral decisions & private investor ownership
- Price transparency
Competition policy
- Theory & practice of competition law
- No horizontal merger control
- Hospital merger control
- Retrospective merger analysis
- Ex ante merger simulation
- Special topic; pricing in oncology
Industrial organization
External organization for firms where they need to operate
- Study for the Functioning of markets (analysis of market power and
regulation)
- Behavior of firms (GP, pharmacy, health insurers) following all kinds
of incentive given by the industrial organization
Perfect competition
- Perfect information not asymmetrical
- Unlimited suppliers and buyers (no market power)
- Homogenous products
- Easy to enter the market
Perfect from the societal perspective (buy anything you need etc.), market
not has to worry
Requirements for perfect competition and violation
1. Standardized (homogenous products)
o Violated – differences in quality (hospitals for example)
2. Price taking behavior
o Patents and monopolies
o Big buyers (large insurers)
, 3. Free entry and exit
o Entry not easy, think of doctors
o Hospitals huge investments
4. Perfect information
o Biggest problem
o Agent principal problem
Government regulation is required but,
- Just rely on government regulation and rule out incentives?
o Overlooking government failure
Government also suffers from information problems, self-interest
(politicians in short term solutions than long term)
Question: how to navigate between market failure (use regulation) and
government failure (use incentives)
Gaynor et al. - The industrial organization of healthcare markets
Growing prominence of healthcare markets
- Increasing availability of rich datasets
- Advances in economics methodology
- Institutional chances
The multistage model – 5 stages impact the outcomes of markets and
welfare
1. Quality determination in provider markets
2. Price and network determination in provider markets
3. Premium determination in insurance markets
4. Consumer choice in insurance markets (2-sided market health
insurers and providers)
5. Incentives and provider referral desicions/consumer utilization
optimal choices in one stage are functions of expectations regarding the
rest…
,Quality determination in provider markets
- Hospital related mortality -> bad outcome quality measures
What mechanism should affect quality?
- Strategic selection of patients
- Hospital standardized mortality rate (correction)
Strategic choice for lower quality is unlikely
More likely lower effort in more concentrated hospital markets
- Fewer providers: less extrinsic incentives to undertake efforts, as
patients will be there anyway
Lower concentrated market (strong competition) lead to lower quality
- Competition based on price cost cuts lowers quality
2 different types of market
- Markets with regulated prices
o Marginal costs are below regulated price increase quality
o Quality is increasing in price, the elasticity of demand with
respect to quality and the firms total demand
o Quality is decreasing in the marginal costs of quantity or
quality
- zej = eq. quality hopital j
- p = regulated price
- cq & cz = mc of quantity & quality
- sj = market share hospital j
- D = total market demand
- Markets were can set price and quality
o Strategic decision making focus on prices (to gain market
share) or quality improvements to attract more patients
o Dorfman-Steiner condition
Quality will increase if the quality elasticity of demand
increase or the price of elasticity of demand declines
(vice versa)
Quality will also increase if price increases relative to the
marginal costs of quality (and fall if the opposite
happens)
, - Quality elasticity (quality sensitive) more likely to increase quality
- Price elasticity (price sensitive, insurers) more likely to lower
quality
- z = quality
- p = price
- d = mc of quality
- z = quality elasticity of demand
- p = price elasticity of demand
Hospital competition and approaches to assess quality
Two approaches:
1. SCP
- Stucture -conduct - performance paradigm
- Estimate the relation between market structure and conduct
hospital in that market
Leads to a certain performance, prices, quality costs
Linear relation between market conduct and
performance
- Structure assessment through HHI
- If a market has four firms with market shares of 30%, 30%, 20%,
and 20%, the HHI is: 302 +302 +202 +202 =900+900+ 400+400=2,600
(High Concentration).
- Cross sectional data -> difficult to real causal relationship, only a
prediction
- Price as relation between cost shifters and market costs
Not a direct one-way relationship
Other factors that impact the conduct than structure
