Healthcare Exceptionalism? Performance and Allocation in the U.S. Healthcare Sector

Abstract

The conventional wisdom for the healthcare sector is that idiosyncratic features leave little scope for market forces to allocate consumers to higher performance producers. However, we find robust evidence -across several different conditions and performance measures -that higher quality hospitals have higher market shares and grow more over time. The relationship between performance and allocation is stronger among patients who have greater scope for hospital choice, suggesting that patient demand plays an important role in allocation. Our findings suggest that healthcare may have more in common with "traditional" sectors subject to market forces than often assumed. KeywordsHospital Performance; Allocation; Healthcare A classic "signpost of competition" in manufacturing industries is that higher productivity producers are allocated greater market share at a point in time and over time. The conventional wisdom in the healthcare sector, however, is that idiosyncratic, institutional features of this sector dull or eliminate these competitive reallocation forces. Oft-cited culprits include consumers who lack knowledge of or time to respond to the quality and price differences across providers, generous health insurance that insulates consumers from Correspondence address: Chad Syverson, Chicago Booth and NBER; chad.syverson@chicagobooth.edu, Room 519, 5807 South Woodlawn Avenue, Chicago, IL 60637. JEL classification: D22, D24, I11 Finkelstein, Sacarny, and Syverson declare that they have no relevant or material financial interests that relate to the research described in this paper. Chandra reports serving on the Congressional Budget Office (CBO) Panel of Health Advisors. Other disclosures are available at https://www.hks.harvard.edu/about/ faculty-staff-directory/amitabh-chandra. HHS Public AccessAuthor manuscript Am Econ Rev. Author manuscript; available in PMC 2016 October 24. Author Manuscript Author ManuscriptAuthor Manuscript Author Manuscript the direct financial consequences of their healthcare consumption decisions, and public sector reimbursement that provides little incentive for providers to achieve productive efficiency. These factors are widely believed to dampen the disciplining force of demandside competition that exists in most other sectors.This notion of "healthcare exceptionalism" has a long tradition in health economics. It dates back at least to the seminal article of Arrow (1963), which started the modern field of health economics by emphasizing key features of the health care industry that distinguish it from most other sectors and therefore warrant tailored study. Echoing and advancing the view that demand-side competition does not discipline healthcare providers, Cutler (2010) notes:" [T]here are two fundamental barriers to organizational innovation in healthcare. The first is the lack of good information on quality. Within a market, it is difficult to tell which providers are high quality and which are low quality. … Difficulty measuring quality also makes expansion of high-quali...

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