Hospital Competition, Quality, and Expenditures in the U.S. Medicare Population

Abstract

Theoretical models of competition with fixed prices suggest that hospitals should compete by increasing quality of care for diseases with the greatest profitability and demand elasticity. Most empirical evidence regarding hospital competition is limited to heart attacks, which in the U.S. generate positive profit margins but exhibit very low demand elasticity -ambulances usually take patients to the closest (or affiliated) hospital. In this paper, we derive a theoretically appropriate measure of market concentration in a fixed-price model, and use differential travel-time to hospitals in each of the 306 U.S. regional hospital markets to instrument for market concentration. We then estimate the model using risk-adjusted Medicare data for several different population cohorts: heart attacks (low demand elasticity), hip and knee replacements (high demand elasticity) and dementia patients (low demand elasticity, low or negative profitability). First, we find little correlation within hospitals across quality measures. And second, while we replicate the standard result that greater competition leads to higher quality in some (but not all) measures of heart attack quality, we find essentially no association between competition and quality for what should be the most competitive markets -elective hip and knee replacements. Consistent with the model, competition is associated with lower quality care among dementia patients, suggesting that competition could induce hospitals to discourage unprofitable patients.

Comparing methods of grouping hospitals

“…For instance, HRRs are sometimes used to define competition between hospitals; however, they are likely not well suited to this purpose because they cover areas that are larger than the average hospital's catchment area. When possible, use of custom measures of competition derived from claims data is a preferable solution to any of the methods defined here; however, when access to claims is not available, small CDAs (made up of relatively few hospitals, on average) are likely to more closely identify hospitals that compete with each other by covering a smaller geographic region.…”

Physician network position and patient outcomes following implantable cardioverter defibrillator therapy

“…Teaching status of hospitals was obtained from the American Hospital Association (AHA) and MedPAR and Provider of Services data downloaded from CMS. The hospital‐level HHI was calculated as previously described and represents local market competition normalized so that 1 indicates a monopoly and values approaching zero indicate a perfectly competitive market . To adjust for ICD hospital network prominence, we aggregated the physician ties by hospital affiliation to calculate a hospital‐level degree centrality measure equal to the number of ties a hospital has to other hospitals in the nation …”

The effect of competition on safety management to reduce risk in banking

“…Kessler and McClellan (2000) estimated a positive relationship between competition and safety quality in USA. Colla et al (2014) indicated that the relationship between competition and safety quality depends on diseases that are related to demand elasticity and profitability in the US Medicare program. Pan et al (2015) showed that the relationship between competition and quality is positive in China.…”