Special Issue
Industrial Organization
of Health Care
Introduction
Thomas C. Buchmueller and Ching-To Albert Ma
Introduction Thomas C. Buchmueller and Ching-To Albert Ma
Introduction Thomas C. Buchmueller and Ching-To Albert Ma
Games Hospitals Play: Entry Deterrence in Hospital Procedure Markets
Leemore S. Dafny
Strategic investment models, though popular in the theoretical literature, have rarely been tested empirically. This paper develops a model of strategic investment in inpatient procedure markets, which are well-suited to empirical tests of this behavior. Potential entrants are easy to identify in such markets, enabling the researcher to accurately estimate the entry threat faced by different incumbents. I derive straightforward empirical tests of entry deterrence from a model of patient demand, procedure quality, and differentiated product competition. Using hospital data on electrophysiological studies, an invasive cardiac procedure, I find evidence of entry-deterring investment. These findings suggest that competitive motivations play a role in treatment decisions.
Strategic investment models, though popular in the theoretical literature, have rarely been tested empirically. This paper develops a model of strategic investment in inpatient procedure markets, which are well-suited to empirical tests of this behavior. Potential entrants are easy to identify in such markets, enabling the researcher to accurately estimate the entry threat faced by different incumbents. I derive straightforward empirical tests of entry deterrence from a model of patient demand, procedure quality, and differentiated product competition. Using hospital data on electrophysiological studies, an invasive cardiac procedure, I find evidence of entry-deterring investment. These findings suggest that competitive motivations play a role in treatment decisions.
HMO Participation in Medicare+Choice
John Cawley, Michael Chernew and Catherine McLaughlin
In recent years, many health maintenance organizations (HMOs) have exited Medicare+Choice (M+C), the program that provides a managed-care option to Medicare. This paper answers the following questions: How does the equilibrium number of HMOs participating in county M+C markets vary with the capitation payment they are offered? How large a payment is required at the margin to ensure that various percentages of county markets have a M+C HMO, or to ensure that various percentages of Medicare beneficiaries have the choice of a M+C plan in their county of residence? The strategy for identifying the effect of government payment on HMO participation relies on a natural experiment; in 1997, Congress divorced M+C payments to HMOs from changes in underlying costs. The results in this paper suggest that the Centers for Medicare & Medicaid Services (CMS) has consistently underestimated the payment necessary to support HMOs in rural, sparsely populated areas. We also find that it would require a large incremental payment to support HMOs in M+C for the final 10% of counties or final 10% of Medicare beneficiaries.
In recent years, many health maintenance organizations (HMOs) have exited Medicare+Choice (M+C), the program that provides a managed-care option to Medicare. This paper answers the following questions: How does the equilibrium number of HMOs participating in county M+C markets vary with the capitation payment they are offered? How large a payment is required at the margin to ensure that various percentages of county markets have a M+C HMO, or to ensure that various percentages of Medicare beneficiaries have the choice of a M+C plan in their county of residence? The strategy for identifying the effect of government payment on HMO participation relies on a natural experiment; in 1997, Congress divorced M+C payments to HMOs from changes in underlying costs. The results in this paper suggest that the Centers for Medicare & Medicaid Services (CMS) has consistently underestimated the payment necessary to support HMOs in rural, sparsely populated areas. We also find that it would require a large incremental payment to support HMOs in M+C for the final 10% of counties or final 10% of Medicare beneficiaries.
The Effects of Competition on Variation in the Quality and Cost of Medical Care
Daniel P. Kessler and Jeffrey J. Geppert
We estimate the effects of hospital competition on the level of and the variation in quality of care and hospital expenditures for elderly Medicare beneficiaries with heart attack. We compare competition's effects on more-severely ill patients, whom we assume value quality more highly, to the effects on less-severely ill, low-valuation patients. We find that low-valuation patients in competitive markets receive less intensive treatment than in uncompetitive markets, but have statistically similar health outcomes. In contrast, high-valuation patients in competitive markets receive more intensive treatment than in uncompetitive markets, and have significantly better health outcomes. Because this competition-induced increase in variation in expenditures is, on net, expenditure-decreasing and outcome-beneficial, we conclude that it is welfare-enhancing. These findings are inconsistent with conventional models of vertical differentiation, although they can be accommodated by more recent models.
We estimate the effects of hospital competition on the level of and the variation in quality of care and hospital expenditures for elderly Medicare beneficiaries with heart attack. We compare competition's effects on more-severely ill patients, whom we assume value quality more highly, to the effects on less-severely ill, low-valuation patients. We find that low-valuation patients in competitive markets receive less intensive treatment than in uncompetitive markets, but have statistically similar health outcomes. In contrast, high-valuation patients in competitive markets receive more intensive treatment than in uncompetitive markets, and have significantly better health outcomes. Because this competition-induced increase in variation in expenditures is, on net, expenditure-decreasing and outcome-beneficial, we conclude that it is welfare-enhancing. These findings are inconsistent with conventional models of vertical differentiation, although they can be accommodated by more recent models.
How to Regulate Heterogeneous Hospitals?
Brigitte Dormont and Carine Milcent
In many areas of health care financing, there is controversy over the sources of cost variability and about the respective roles of inefficiency versus legitimate heterogeneity. This paper proposes a payment system that creates incentives to increase hospital efficiency when hospitals are heterogeneous, without reducing the quality of care. We consider an extension of Shleifer's yardstick competition model and apply an econometric approach to identify and evaluate observable and unobservable sources of cost heterogeneity. Moral hazard can be seen as the result of two components: long-term moral hazard (hospital management can be permanently inefficient) and transitory moral hazard. The latter is linked to the manager's transitory cost-reducing effort.
In many areas of health care financing, there is controversy over the sources of cost variability and about the respective roles of inefficiency versus legitimate heterogeneity. This paper proposes a payment system that creates incentives to increase hospital efficiency when hospitals are heterogeneous, without reducing the quality of care. We consider an extension of Shleifer's yardstick competition model and apply an econometric approach to identify and evaluate observable and unobservable sources of cost heterogeneity. Moral hazard can be seen as the result of two components: long-term moral hazard (hospital management can be permanently inefficient) and transitory moral hazard. The latter is linked to the manager's transitory cost-reducing effort.
Waiting Lists and Patient Selection
Pedro Pita Barros and Pau Olivella
We develop a positive model of waiting lists for public hospitals when physicians are able to divert patients from the public to the private sector. Public treatment is free but rationed, i.e., only cases meeting some medical criteria are admitted. Private treatment has no waiting time but entails payment of a fee. Physicians and patients take into account that each patient treated in the private practice reduces the waiting list for public treatment. We show that physicians do not necessarily end up treating the mildest cases from the waiting list. Our analysis is valid for a wide class of doctors' utility functions.
We develop a positive model of waiting lists for public hospitals when physicians are able to divert patients from the public to the private sector. Public treatment is free but rationed, i.e., only cases meeting some medical criteria are admitted. Private treatment has no waiting time but entails payment of a fee. Physicians and patients take into account that each patient treated in the private practice reduces the waiting list for public treatment. We show that physicians do not necessarily end up treating the mildest cases from the waiting list. Our analysis is valid for a wide class of doctors' utility functions.
The Existence and Nature of Physician Agency: Evidence of Stinting from the British National Health Service
Martin Chalkley and Colin Tilley
The ability of physicians to make take-it-or-leave-it offers of treatment implies that even fully informed consumers of health care may receive treatments that they would not themselves choose. This paper examines both the extent and direction of this distortion away from patient choice—the physician agency effect—using a large patient-level claims-based data set for dental treatments under the British National Health Service. We find that an improvement in the outside opportunities of patients results in a small but significant increase in the level of service provided when dentists are remunerated on a fee-for-service basis. This is suggestive of stinting, wherein physician agency results in undertreatment relative to what patients would choose. We further find that the effect is increased when patients are fully insulated from the cost of their treatment.
The ability of physicians to make take-it-or-leave-it offers of treatment implies that even fully informed consumers of health care may receive treatments that they would not themselves choose. This paper examines both the extent and direction of this distortion away from patient choice—the physician agency effect—using a large patient-level claims-based data set for dental treatments under the British National Health Service. We find that an improvement in the outside opportunities of patients results in a small but significant increase in the level of service provided when dentists are remunerated on a fee-for-service basis. This is suggestive of stinting, wherein physician agency results in undertreatment relative to what patients would choose. We further find that the effect is increased when patients are fully insulated from the cost of their treatment.
An Alternative Perspective On Information Asymmetry; Implications For Consumer Authority In Physician Services Markets
Richard B. Smith
This paper looks at the impact of patient knowledge on utilization and quality in physician services markets, developing a theoretical framework based on an alternative to the “market failure” perspective first proposed by Arrow (1963). Specifically, this paper looks at how outcomes in physician services markets are determined by whether patient and physician knowledge are substitutes or complements in health production. Empirical testing of the theoretical predictions indicates patient and physician knowledge have changed from substitutes to complements in recent years, and that this change may be hindering a more consumer-driven market from ensuring high quality outcomes.
This paper looks at the impact of patient knowledge on utilization and quality in physician services markets, developing a theoretical framework based on an alternative to the “market failure” perspective first proposed by Arrow (1963). Specifically, this paper looks at how outcomes in physician services markets are determined by whether patient and physician knowledge are substitutes or complements in health production. Empirical testing of the theoretical predictions indicates patient and physician knowledge have changed from substitutes to complements in recent years, and that this change may be hindering a more consumer-driven market from ensuring high quality outcomes.
The Effect of Prescription Drug Advertising on Doctor Visits
Toshiaki Iizuka and Ginger Zhe Jin
The dramatic increase of direct-to-consumer advertising (DTCA) of prescription drugs created intensive debates on its effects on patient and doctor behaviors. Combining 1994–2000 DTCA data with the 1995–2000 National Ambulatory Medical Care Surveys, we examine the effect of DTCA on doctor visits. Consistent with the proponents' claim, we find that higher DTCA expenditures are associated with increased doctor visits, especially after the Food and Drug Administration clarified DTCA rules in August 1997. After 1997, every $28 increase in DTCA leads to one drug visit within 12 months. We also find that the market-expanding effect is similar across demographic groups.
The dramatic increase of direct-to-consumer advertising (DTCA) of prescription drugs created intensive debates on its effects on patient and doctor behaviors. Combining 1994–2000 DTCA data with the 1995–2000 National Ambulatory Medical Care Surveys, we examine the effect of DTCA on doctor visits. Consistent with the proponents' claim, we find that higher DTCA expenditures are associated with increased doctor visits, especially after the Food and Drug Administration clarified DTCA rules in August 1997. After 1997, every $28 increase in DTCA leads to one drug visit within 12 months. We also find that the market-expanding effect is similar across demographic groups.
The Impact of a Three-Tier Formulary on Demand Response for Prescription Drugs
Haiden A. Huskamp, Richard G. Frank, Kimberly A. McGuigan and Yuting Zhang
A large number of health plans and employers have adopted three-tier prescription drug formularies in an effort to control rising prescription drug costs. We assessed the behavioral response to three-tier adoption by estimating econometric models of the probability of selecting drugs assigned to the third tier with the highest co-payment requirement and changes in expected out-of-pocket (OOP) spending. We concluded that implementation of the three-tier formulary resulted in some shifting of costs from the plan to enrollees and some bargaining power gained for the payer, with plan savings from manufacturer rebates a likely result.
A large number of health plans and employers have adopted three-tier prescription drug formularies in an effort to control rising prescription drug costs. We assessed the behavioral response to three-tier adoption by estimating econometric models of the probability of selecting drugs assigned to the third tier with the highest co-payment requirement and changes in expected out-of-pocket (OOP) spending. We concluded that implementation of the three-tier formulary resulted in some shifting of costs from the plan to enrollees and some bargaining power gained for the payer, with plan savings from manufacturer rebates a likely result.
Spillover Effects of Restrictive Drug Formularies on Physician Prescribing Behavior: Evidence from Medicaid
Y. Richard Wang and Mark V. Pauly
Restrictive drug formularies may influence physician prescribing behavior for other patients with more generous drug benefit, so-called “spillover effects.” We focus on Protonix, a proton pump inhibitor, introduced at a discount price, and study subsequent physician prescribing decision for open-formulary Medicaid patients. Using two national databases on physician prescribing patterns and health plan drug formularies, we find consistent evidence of significant, positive spillover effects from 1-PPI and 2-PPI formularies that include Protonix onto Medicaid, with a larger effect from the most restrictive, 1-PPI formularies. Physicians who prescribe a higher proportion of Protonix to their non-Medicaid patients because of restrictive formularies, also prescribe a higher proportion of Protonix to their Medicaid patients with an open formulary. Each 10% increase in Protonix's predicted non-Medicaid share results in an 8% increase in its share of Medicaid prescriptions (p < 0.001). Similar spillover effects seem to exist for older PPI products as well. A restrictive drug formulary therefore influences physician prescribing behavior for other patients not directly subject to its restrictions.
Restrictive drug formularies may influence physician prescribing behavior for other patients with more generous drug benefit, so-called “spillover effects.” We focus on Protonix, a proton pump inhibitor, introduced at a discount price, and study subsequent physician prescribing decision for open-formulary Medicaid patients. Using two national databases on physician prescribing patterns and health plan drug formularies, we find consistent evidence of significant, positive spillover effects from 1-PPI and 2-PPI formularies that include Protonix onto Medicaid, with a larger effect from the most restrictive, 1-PPI formularies. Physicians who prescribe a higher proportion of Protonix to their non-Medicaid patients because of restrictive formularies, also prescribe a higher proportion of Protonix to their Medicaid patients with an open formulary. Each 10% increase in Protonix's predicted non-Medicaid share results in an 8% increase in its share of Medicaid prescriptions (p < 0.001). Similar spillover effects seem to exist for older PPI products as well. A restrictive drug formulary therefore influences physician prescribing behavior for other patients not directly subject to its restrictions.
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