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Summary Lectures Competition in Health Care Markets ()
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Lecture notes of 74 pages for the course Competition in Health Care Markets at EUR (-)
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Competition in HC markets SummaryInhoudsopgave
Week 1:......................................................................................................................................................... 2
Topic 1: Industrial organization: a brief introduction...........................................................................................2
Topic 2.1: Network formation and price negotiations.........................................................................................8
Topic 2.2: network formation and price negotiation............................................................................................9
Topic 2.3: network formation and price negotiation.........................................................................................11
Topic 2.4: network formations and price negotiations......................................................................................14
Week 2: insurer premium setting and health plan choice..............................................................................17
Topic 3.1 insurer premium setting and health plan choice................................................................................17
Topic 3.2 insurer premium setting and health plan choice................................................................................17
Topic 3.3 insurer premium setting and health plan choice................................................................................21
Topic 3.4 Insurer premium setting and health plan choice................................................................................23
Topic 4: Physician treatment & referral decisions and price transparency........................................................25
Topic 4.1.............................................................................................................................................................25
Topic 4.2.............................................................................................................................................................28
Topic 4.3.............................................................................................................................................................31
Week 3: An introduction to competition law AND POLICY............................................................................35
Topic 5.1 Part I-Principles...................................................................................................................................35
Topic 5.2 Part II: II-Agreements and concerted practices...................................................................................38
Topic 5.3 Abuse of a dominant position.............................................................................................................43
Topic 5.4 Merger Control....................................................................................................................................46
Topic 6: putting theory into practice..................................................................................................................49
Week 4:....................................................................................................................................................... 50
Topic 7.1: Competition & competition policy in markets for health care: international experiences &
challenges (part 1)..............................................................................................................................................50
Topic 7.2 Competition & competition policy in markets for health care: international experiences &
challenges...........................................................................................................................................................51
Topic 8.1 Monopsony power in health care.......................................................................................................55
Topic 8.2 Vertical integration in health care......................................................................................................57
Week 5: Market definition as a premilinary step for effective hospital merger control..................................63
Topic 9.1: Market definition and hospital merger control.................................................................................63
Topic 9.2 Market definition & hospital merger control (part 2).........................................................................65
Topic 9.3 Market definition & hospital merger control (part 3).........................................................................71
1
,Week 1:
Topic 1: Industrial organization: a brief introduction
What is industrial organization? Definition:
“To study industrial organization (IO) is to study the functioning of markets, a central concept in
microeconomics.” study the functioning of HC markets, and how competition policy, should be applied
to help function HC markets better.
IO of HC markets: The functioning of HC is not without problems:
“No other market of substantial importance violates the requirements of perfect competition so radically.”
meaning: free competition will never work in HC, because perfect competition will only work when 4
requirements for perfect competition are met:
1. Standardized (homogenous) products only heterogenous products in HC. Even the same type
of treatment will be different for specific patients, given their specific needs.
2. Price-taking behaviour price-taking behaviour in a market with perfect competition means
that each individual company/supplier has no influence on the market price. Market price is
determined by total market demand and supply, because there are so many suppliers, none of
them individually has market power. It is the complete absence of dominant positions. In HC
markets, this is highly unlikely, there are dominant parties.
3. Free entry & exit to enter the market there are huge investments and entry requirements like
licenses. There is no treat for potential new competitors. Downside = exit is also not free, because
all the investments are lost when you leave the market.
4. Perfect information in HC market information is neither perfect, nobody knows anything
about quality. And when there is information about e.g. quality, this is asymmetrically divided
between the parties (patient, provider, insurer). Both a lack of and asymmetric information which
results in agency-problems.
Only when these four requirements are fulfilled, there is perfect competition. The violation of these four
requirements is the worst in HC, therefore making it more problematic. The stakes in the HC market are
higher than in other markets. We therefore need government regulation.
Government regulation is required, but …
- … just like markets, governments are also far from perfect! so we need governments to avoid
market failure, but in doing so we also have government failure.
- Hence, improving the functioning of health care markets is all about: how to navigate between
market failure & government failure? the balance between the market and government failure is
essential to the functioning of HC. How to improve the functioning of the HC market is a discussion
on how to balance market forces (competition) and government rules and regulation.
IO of HC: Key issues
Presentation of overview of the most important empirical findings of the
functioning of HC markets. They discuss these findings by using a
framework of 5 different stages.
There is growing interest in the IO of HC. increasing availability
of datasets of HC markets combined with advances in economic
methodology and what is mentioned here : ““There has been growing interest among economists
in recent years in the industrial organization of health care markets. This is due in part to the
growing prominence of health-care markets in policy issues, the increasing availability of rich
datasets on health care, advances in economics methodology, and institutional changes that
have led to a greater role and prominence for markets in health care.” combination of
relevance and opportunity.
2
, - Opportunities to conduct empirical research in the area of IO of HC (the functioning of the HC
markets) has improved. & Relevance of this type of research has increased.
Gaynor et al. (2015): “multistage model”
- Discussion of the literature structured around 5 stages.
- Each stage has an impact on equilibrium outcome and welfare.
- 5 stages are not in isolation but are related “optimal choices in one stage are functions of
expectations regarding the rest” something that happens in stage 1, might have a (in)direct
impact on the other stages.
1. Quality determination in provider markets M1
2. Price and network determination in provider markets M2 how do insurers come to
networks and how are prices determined in provider markets.
3. Premium determination in insurance markets M3
4. Consumer choice in insurance markets M3
5. Incentives and provider referral decisions/consumer utilization M4
Next issue: industrial organization of HC Stage 1: quality determination in provider markets
It is important to have an idea on how this works: summarized does competition between HC providers
increases or decreases quality? Important question because quality is one of the 3 main goals when the
government discusses the functioning of the HC market: 1) quality (high quality of HC), 2) accessibility
(quality that is accessible for everyone), 3) affordability.
Hospital competition and quality: theory (1)
From the perspective of economic theory: what mechanisms could explain that hospital competition
effects quality? If hospitals are expected to compete do they have an incentive to either increase quality,
or to neglect quality and focus on cost reductions?
Two important observations:
1) Strategic choice for lower quality is unlikely unlikely that hospitals at some point in time
make a strategic decision for lowering their quality.
2) More likely: lower effort in more concentrated hospital markets more likely that in more
concentrated hospital markets (= hospital markets with less competition), there is a lower effort
to improve quality. The focus might be to increase profitability and reducing costs, than
neglecting the effects on quality. So mechanisms that could explain that hospital competition
effects quality is more indirect than a direct one.
Concentration and competition (sidestep)
What determines the concentration in a market? You look at the number of firms and the market share of
the individual firms. The higher the market share of a few firms, the higher the concentration of the
market is and the less competitive that market is. The HHI is a measure of concentration: value of
10.000 for a monopoly this measure is the aggregation of all individual market shares of the firms
squared. So 1 firm, market share = 100%, the HHI = 100*100 = 10.000. Duopoly both have a market
share of 50% , HHI = 502+502 = 5000.
So the lower the concentration rate, the more competitive the market is. That is the relation between
concentration and competition. Higher concentration = less competition.
Hospital competition & quality: theory (2)
Economic theory distinguishes 2 types of markets
1) Markets with regulated prices: hospital markets where prices are regulated by the government
but hospitals compete on quality. Relation between the equilibrium quality of the hospital and
several variables: see formula.
o zej = eq. quality hopital j
o p = regulated price
o cq & cz = mc of quantity & quality
o sj = market share hospital j
3
, o D = total market demand
- Predictions from economic theory:
o Quality is increasing in price (that is the higher the regulated price, the higher the quality
of demand) the higher the elasticity of demand with respect to quality (so the more
people are interested in high quality of HC the more demand is vulnerable to changes in
quantity) and the firm’s total demand.
o Quality is decreasing in the marginal costs of quantity or quality the higher the
marginal cost, the lower quality or quantity may be. Most important point to take-away:
as long as regulated price > marginal cost, competition will result in higher quality.
Competition will be quality based and HC providers will have an incentive to improve
quality, because then they can outperform their competitors, they can increase market
share which is good for them in a competitive market.
2) Markets where hospitals set prices and quality: hospitals set both prices and quality, so markets
with unregulated prices. The relation between competition and quality is more complex and it
depends upon quality elasticity of demand and price elasticity of demand. See formula:
o Dorfman-Steiner condition
z = quality
p = price
d = mc of quality
z = quality elasticity of demand
p = price elasticity of demand
- Article Roos et al: when prices are unregulated, the impact of competition on quality depends on
how competition affects the responsiveness of demand on quality relative to its responsiveness to
price. If consumers, or insurers purchasing on their behalf, observe prices but have only imperfect
information on quality, then competition might be expected to raise the price sensitivity relative to
the quality sensitivity of demand, and so reduce quality.
o If competition exerts downward pressure on the price relative to the marginal cost and/or
raises the magnitude of the price elasticity relative to the quality elasticity, then it will
reduce quality.
o If quality is sufficiently observable, then competition could conceivably raise the quality
elasticity relative to the price elasticity. Quality would increase, provided price does not
fall relative to the marginal cost of quality.
- Therefore the effect of competition on quality with an unregulated price is therefore ambiguous. It
depends on the characteristics of the market, the observability of quality and the objective
functions of the demand-side and supply-side agents (insurers and hospitals).
-
- Quality will increase if the quality elasticity of demand increases (so the more likely the hospital
is able to increase its market share because people react to higher quality, then he will have an
incentive to increase quality) or the price elasticity of demand declines (and vice versa) the
lower the price elasticity of demand, the more likely it is that the quality elasticity of demand is
more important.
- Quality will also increase if price increases relative to the marginal cost of quality (and fall if the
opposite happens) makes sense otherwise if the price increases, investments in more quality
would be more profitable.
Conclusion:
In markets where hospitals set both prices and quality it depends on the relation between quality
elasticity of demand and the price elasticity of demand. If on the demand side people/patients are willing
to go to hospitals with lower prices, rather than higher quality, then competition is likely to result in
quality deterioration. But if people are more interested in high quality care and prefer high quality over
low prices, then competition is likely to increase quality in those markets.
4
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