How do hospital markets respond to universal health insurance?

This paper studies the effects of universal health insurance reform on health care supply by examining how the implementation of National Health Insurance (NHI) in Taiwan affected the structure of the hospital sector. The massive increase in insurance coverage increased demand but also greatly reduced price differentials among hospitals. We use regional differences in the proportion of uninsured elderly before the reform to identify how these consequences of NHI affected hospitals. We find the reform resulted in a significant decrease in the number of hospitals, and that most of those exiting were small hospitals that offered fewer services and employed fewer doctors. Examination of the input choices and utilization rates of individual hospitals shows that large hospitals increased staffing levels and other inputs, and experienced higher utilization rates, while small hospitals did not; instead, many became clinics. The results suggest that the introduction of universal health insurance caused large hospitals to expand and prosper while small hospitals remained the same size or exited.