Competition in Health Care Markets – Health Economics, Policy & Law (GW4573M)
Merel Hoogstad
In this course, you will be introduced to determinants of market structure, prices, quality, provider networks and
competition in health insurance and provider markets. Unique attributes in health care not only affect the functioning of
market-based health care systems, but also complicate competition enforcement. Therefore, competition enforcement in
the health care sector is also extensively discussed.
M1 We will kick-off our analysis of the industrial organization literature on health care markets. What are the most
important sources of market failure and government failure in health care? How do healthcare markets functionate? And
what do we know about the effects of competition in health care?
M2 We will focus on another key issue in the industrial organization of health care markets. That is, the stage when some
consumers get sick and utilize providers either from within their insurers’ networks or (incurring a larger out-of-pocket
payment) from outside the network. In this context, special attention will be paid to price setting by hospitals and the pros
& cons of price transparency tools.
M3 We will focus on a key issue in the industrial organization of health care markets; the stage where providers and
insurers negotiate about insurers’ provider networks and the prices paid to providers.
M4 We will focus on two other key issues in the industrial organization of health care markets, which are the stages where
(i) insurers choose their premiums to maximize their objective functions, taking into account their own characteristics and
those of competing insurers, and (ii) consumers observe each insurers' provider network and other characteristics,
including premiums, and choose their insurers.
M5 In many jurisdictions’ healthcare providers and others actors (such as health insurers, pharmaceutical companies) are
required to operate within the boundaries of competition law. Those boundaries are mainly formed by the so-called three
pillars of competition law, i.e., the prohibition on agreements and concerted practices restricting competition (article 101
TFEU), the prohibition on abuse of dominance (article 102 TFEU) and merger control (regulation 139/2004).
M6 After having looked into basic concepts of competition law in M5, we will now have a look at the application of (some
of) these concepts in practice in the healthcare sector and challenges that authorities and/or parties might face.
M7 We will take a closer look at the international experiences with competition and (the most important challenges for)
competition law enforcement.
M8 The focus is on monopsony power and vertical integration in health care. More specifically, we will discuss (i) the pros
& cons of insurer market power when negotiating contracts with providers of health care, and (ii) the potential advantages
and disadvantages of vertical integration in health care (e.g., insurer-provider integration).
M9 We will look into the theory and practice of hospital merger control and defining the relevant market as preliminary
step towards the objective of assessing hospital market power. Using experiences from different countries, the traditional
and new methods for defining relevant hospital markets will be compare and judged.
M10 We will discuss two topics that are crucially important in the context of merger control in health care markets; i.e. (i)
ex post merger analysis and (ii) ex ante merger simulation. Both the working and accuracy of different methods will be
analyzed after which their pros & cons are summarized.
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, Competition in Health Care Markets – Health Economics, Policy & Law (GW4573M)
Merel Hoogstad
M1: The industrial organization of health care markets – Marco Varkevisser
Mandatory literature
The Industrial Organization of Health-Care Markets – Gaynor, Ho, Town (235-251 & 276-279; 21 pages)
Does price deregulation in a competitive hospital market damage quality? – Roos, O’Donnell, Schut, Van Doorslaer, Van Gestel, Varkevisser
(16 pages)
Lecture
Course set up
Part 1: Functioning and performance of health care markets
- Network formation M4
- Price negotiations M4
- Insurer premium setting M3
- Health plan choice M3
- Physician treatment & referral decisions M2
- Price transparency M2
Part 2: Competition policy in health care
- Theory & practice of competition law (in health care) M5 & M6
- Non-horizontal merger control = vertical integration M8
- Hospital merger control M9
- Retrospective merger analysis M10
- Ex ante merger simulation M10
- “Theory meets practice” M11
Industrial organization: a short introduction
Competition in health care is fiercely debated:
“In health care, competition is an easy scapegoat (= zondebok). So, you hear many politicians shouting that we should get rid of
competition. Arguing that would solve all problems is simplistic wishful thinking. It sounds good and scores well electorally, but it does not
do justice to the complex reality of health care. In the health care sector, we need a competition of market incentives and government
regulation.”
The three goals for policy makers within healthcare: accessibility, affordability and good quality.
The industrial organization = “to study industrial organization is to study the functioning of markets.” Industrial organization is about the
combination of market power and government regulation.
“No other market of substantial importance violates the requirements of perfect competition so radically.”
- Perfect competition = no market failure = demand is equal to the supply.
- All requirements of perfect competition are violated in the health care market.
1. Homogenous products is violated because the services are heterogeneous: same treatment is different in different hospitals.
2. Price-taking behaviour = the market determents the price because there are a lot of buyers and sellers; violated because of
there is the existence of dominant positions on the demand and supply side, e.g.; insurances.
3. Free entry and exit is violated because health providers and insurance companies need a lot of money to enter the market,
besides there are also trust issues.
4. Perfect information (transparency) is violated because there is incomplete information.
Government regulation is required, but just like markets, government are also far from perfect. Hence, improving the functioning of
healthcare markets is all about: how to navigate between market failure and government failure?
The Industrial Organization of Health-Care Markets – Gaynor, Ho, Town (235-251 & 276-279; 21 pages)
“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 market in health care.”
In this article they explain the multistage model which consists of five stages:
1. Quality determination in provider markets; how do healthcare providers determine quality? M1
2. Price and network determination in provider markets; how do insurers select healthcare providers? M3
3. Premium determination in insurance markets M4
4. Consumer choice in insurance markets; how do consumers select insurers? M4
5. Incentives and provider referral decisions/consumer utilization; how do physicians behave? M2
Each stage has impact on equilibrium outcome and welfare. The stages are related: optimal choices in one stage are function of
expectations regarding the rest.
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, Competition in Health Care Markets – Health Economics, Policy & Law (GW4573M)
Merel Hoogstad
THEORY: Industrial organization of health care: quality determination in provider markets
What mechanism could explain that hospital competition affects quality? A strategic choice for lower quality is unlikely, but most likely is to
put lower effort in more concentrated hospital markets.
Markets with regulated prices
e
z j =z ( p , c q ,c z , s j , D)
e
( z j = equilibrium quality hospital j, p = regulated price, c q and c z = marginal costs of quantity and quality, s j = market share hospital j, D
= total market demand)
- The regulated price (p), the elasticity of demand with respect to quality (?) and the firm’s total demand (D) increases the quality.
- The marginal costs of quantity or quality (c q and c z) decreases the quality.
Market where hospitals set prices and quality
p
∗ε
Dorfman-Steiner condition: d z
z=
εp
(z = quality, p = price, d = marginal costs of quality, ε z = quality elasticity of demand, ε p = price elasticity of demand)
- Quality will increase if the quality elasticity of demand (ε z ) increases or the price elasticity of demand (ε p) declines (and vice versa).
- Quality will increase if price (p) increases relative to the marginal cost of quality (d) (and fall if the opposite happens).
LITERATURE: Industrial organization of health care: quality determination in provider markets
Two approaches:
1. SCP = Structure-Conduct-Performance.
- Equation estimated: p=β 0 + β 1 q+ β 2 X D + β3 W + β 4 HHI +¿
(p = price, q = quantity, XD = demand shifters, W = cost shifters, HHI = market
concentration)
- HHI shows the concentration of providers, 0 = no concentration of providers
and 10.000 = high concentration of providers = monopoly. The higher the HHI,
the more concentrated the market. HHI = sum of the squared market shares.
2. Event study/difference-in-difference (DiD) = difference between t-1 and t+1 + the difference between event and control group.
Markets with regulated prices
Is hospital competition socially wasteful? - Kessler & McClellan
- SCP framework
- Significantly higher risk-adjusted (because more complex hospitals have a higher risk compared to locale small hospitals) 1-year
mortality for Medicare AMI patients in more concentrated markets.
What do we know about competition and quality in health care markets? - Gaynor
- Combination of SCP-framework with DiD-approach
- Risk-adjusted mortality from AMI fell more at hospital in less concentrated markets than at hospitals in more concentrated
markets.
Market where hospitals set prices and quality
Competition in health care: lessons from the English experience - Propper
- DiD-approach
- Differences in mortality for hospital in areas with competitors versus those with no competitors were higher during period when
competition was promoted (1991-1995) compared to when competition was discouraged (1996-1998).
- Hospitals in competitive markets reduced unmeasured and unobserved quality in order to improve measured and observed
waiting times.
Does price deregulation in a competitive hospital market damage quality? – Roos, O’Donnell, Schut, Van Doorslaer, Van Gestel,
Varkevisser (16 pages)
- DiD-approach
- No differences in readmission rates for non-emergency hip replacement (data from 2001-2010) between hospitals in less
concentrated markets and more concentrated markets during period when prices were deregulated (>2005) compared to when
prices were regulated (<2005).
- “Overall, our results lend provisional support for the conclusion that permitting price competition among Dutch hospitals did not
negatively impact on quality.”
- Three potential explanations for 'null effect': (1) focus on readmissions misses effects on other types of quality, (2) empirical
strategy delivers a lower bound on the quality effect, (3) Dutch hospitals, which are all NFP (= not for profit), were not prepared
to grasp a competitive advantage obtainable by cutting prices if this required skimping on quality.
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, Competition in Health Care Markets – Health Economics, Policy & Law (GW4573M)
Merel Hoogstad
“The empirical literature on competition and quality in health care markets is, for the most part, fairly recent and has grown very rapidly.
(...) The challenge for researchers will be specifying models that are true to the important institutional facts while being tractable enough
for estimation. In addition, the measures of quality have for the most part been confined to patient mortality. While that is undoubtedly
significant, it will be important to employ other measures in order to obtain a more complete picture of the impacts of competition on
health care quality.” – Gaynor, Ho & Town
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