Hospital markets and the effect of competition on quality

• Alfons Palangkaraya, Jongsay Yong
• Melbourne Institute of Applied Economic and Social Research

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29 June 2009This paper investigates the effects of competition on hospital quality. It proposes to extend the Elzinga-Hogarty quantity flow approach of defining markets by first determining the trading cluster to which each hospital belongs and then delineating markets using patient flow information. 

After defining hospital markets and computing measures of competition, this paper examines the effect of competition on hospital quality using hospital administration data from the state of Victoria, Australia. We approximate quality using two indicators, namely mortality within 30 days of discharge and unplanned readmission within 28 days of discharge. For each quality indicator, a random intercept logit model is estimated.

Two main findings are reported. First, the boundaries of markets and hence the degree of competition depend on the nature of the medical services provided. Second, competition is found to have a mixed effect on quality of hospital care -- increasing the number of private hospitals appears to lower quality, while increasing the number of public hospitals has the opposite effect. The intensity of competition, on the other hand, does not appear to have a statistically significant effect on quality.