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The Effects of Competition on Variation in the Quality and Cost of Medical Care

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  • Daniel P. Kessler
  • Jeffrey J. Geppert
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    Abstract

    We estimate the effects of hospital competition on the level of and the variation in quality of care and hospital expenditures for elderly Medicare beneficiaries with heart attack. We compare competition's effects on more-severely ill patients, whom we assume value quality more highly, to the effects on less-severely ill, low-valuation patients. We find that low-valuation patients in less-competitive markets receive more intensive treatment than in more-competitive markets, but have statistically similar health outcomes. In contrast, high-valuation patients in less-competitive markets receive less intensive treatment than in more-competitive markets, and have significantly worse health outcomes. Since this competition-induced increase in variation in expenditures is, on net, expenditure-decreasing and outcome-beneficial, we conclude that it is welfare-enhancing. These findings are inconsistent with conventional models of vertical differentiation, although they can be accommodated by more recent models.

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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11226.

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    Date of creation: Mar 2005
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    Publication status: published as Kessler, Daniel P.and Jeffrey J. Geppert. "The Effects of Competition on Variation in the Quality and Cost of Medical Care." Journal of Economics and Management Strategy 14, 3 (Fall 2005): 575-89.
    Handle: RePEc:nbr:nberwo:11226

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    1. Daniel P. Kessler & Mark B. McClellan, 2000. "Is Hospital Competition Socially Wasteful?," The Quarterly Journal of Economics, MIT Press, vol. 115(2), pages 577-615, May.
    2. Anderson,S.P. & de Palma,A., 1995. "Product Diversity in Asymmetric Oligopoly:Is the Quality of Consumer Goods Too Low?," Papers 9521, Paris X - Nanterre, U.F.R. de Sc. Ec. Gest. Maths Infor..
    3. Tay, Abigail, 2003. " Assessing Competition in Hospital Care Markets: The Importance of Accounting for Quality Differentiation," RAND Journal of Economics, The RAND Corporation, vol. 34(4), pages 786-814, Winter.
    4. Daniel P. Kessler & Mark B. McClellan, 2002. "The Effects of Hospital Ownership on Medical Productivity," RAND Journal of Economics, The RAND Corporation, vol. 33(3), pages 488-506, Autumn.
    5. Acharyya, Rajat, 1998. "Monopoly and product quality: Separating or pooling menu?," Economics Letters, Elsevier, vol. 61(2), pages 187-194, November.
    6. Steven T. Berry & Joel Waldfogel, 1999. "Free Entry and Social Inefficiency in Radio Broadcasting," RAND Journal of Economics, The RAND Corporation, vol. 30(3), pages 397-420, Autumn.
    7. Capps, Cory & Dranove, David & Satterthwaite, Mark, 2003. " Competition and Market Power in Option Demand Markets," RAND Journal of Economics, The RAND Corporation, vol. 34(4), pages 737-63, Winter.
    8. GABSZEWICZ, Jean J. & THISSE, Jacques-François, . "Entry (and exit) in a differentiated industry," CORE Discussion Papers RP -400, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    9. Shaked, Avner & Sutton, John, 1982. "Relaxing Price Competition through Product Differentiation," Review of Economic Studies, Wiley Blackwell, vol. 49(1), pages 3-13, January.
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    Cited by:
    1. Martin Gaynor, 2006. "What Do We know About Competition and Quality in Health Care Markets?," The Centre for Market and Public Organisation 06/151, Department of Economics, University of Bristol, UK.
    2. Brekke, Kurt R. & Siciliani, Luigi & Straume, Odd Rune, 2014. "Hospital Mergers with Regulated Prices," Discussion Paper Series in Economics 21/2014, Department of Economics, Norwegian School of Economics.
    3. Chew Lian Chua & Alfons Palangkaraya & Jongsay Yong, 2011. "Hospital Competition, Technical Efficiency and Quality," The Economic Record, The Economic Society of Australia, vol. 87(277), pages 252-268, 06.
    4. Alfons Palangkaraya & Jongsay Yong, 2013. "Effects of competition on hospital quality: an examination using hospital administrative data," The European Journal of Health Economics, Springer, vol. 14(3), pages 415-429, June.
    5. Chen, Chi-Chen & Cheng, Shou-Hsia, 2010. "Hospital competition and patient-perceived quality of care: Evidence from a single-payer system in Taiwan," Health Policy, Elsevier, vol. 98(1), pages 65-73, November.
    6. Carine Milcent, 2014. "Coût des soins hospitaliers : effet de la concurrence par la qualité," PSE Working Papers halshs-01010327, HAL.
    7. Martin Gaynor & Robert J Town, 2012. "Competition in Health Care Markets," The Centre for Market and Public Organisation 12/282, Department of Economics, University of Bristol, UK.
    8. Mascia, Daniele & Di Vincenzo, Fausto & Cicchetti, Americo, 2012. "Dynamic analysis of interhospital collaboration and competition: Empirical evidence from an Italian regional health system," Health Policy, Elsevier, vol. 105(2), pages 273-281.
    9. Bergman, Mats & Johansson, Per & Lundberg, Sofia & Spagnolo, Giancarlo, 2014. "Privatization and Quality: Evidence from Elderly Care in Sweden," CEPR Discussion Papers 9939, C.E.P.R. Discussion Papers.
    10. Tamara Hayford, 2011. "The Impact of Hospital Mergers on Treatment Intensity and Health Outcomes: Working Paper 2011-05," Working Papers 42753, Congressional Budget Office.
    11. Alfons Palangkaraya & Jongsay Yong, 2009. "Hospital Markets and the Effect of Competition on Quality," Melbourne Institute Working Paper Series wp2009n17, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
    12. Suhui Li & Avi Dor, 2013. "How Do Hospitals Respond to Market Entry? Evidence from A Deregulated Market for Cardiac Revascularization," NBER Working Papers 18926, National Bureau of Economic Research, Inc.
    13. Dranove, David & Lindrooth, Richard & White, William D. & Zwanziger, Jack, 2008. "Is the impact of managed care on hospital prices decreasing?," Journal of Health Economics, Elsevier, vol. 27(2), pages 362-376, March.

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