Quality Transparency and Healthcare Competition

Transparency of quality in the healthcare sector primarily aims to facilitate patients’ care decisions, however, it also provides useful information to competing healthcare providers. We study how competitors respond to increased transparency about rivals’ quality by exploiting a regulatory change that initiated disclosure about the quality of all kidney dialysis facilities in the United States. We show that competitors are 27% more likely to open new facilities near low-quality incumbents after the transparency program is implemented. We also show that the effect of transparency on competition is concentrated in states without licensing requirements that create barriers to entry. Evidence from patient referrals indicates that the new transparency regime increases the sensitivity of demand to quality and that the increase in competition is costly to low-quality incumbents, as they lose 31% of their referrals—equivalent to a $3.74 million loss of a facility’s annual revenue—to higher-quality entrants. Finally, losing referrals leads incumbents to invest in better patient care through an immediate increase in the use of nurse practitioners and social workers.