Hospital Competition Improves Quality and Lowers Cost

Summary of working paper 7266
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Patients in the least competitive fourth of hospital markets experienced approximately 1.5 percentage points higher mortality after heart attacks than those in the most competitive areas.

Not much good is being said these days about Health Maintenance Organizations (HMOs). But NBER Research Associates Daniel Kessler and Mark McClellan have something positive to report. They find that increasing HMO enrollment through the 1980s and 1990s partially explains the increase in the beneficial effects of hospital competition during this period.

In Is Hospital Competition Socially Wasteful? (NBER Working Paper No. 7266), Kessler and McClellan analyze Medicare claims data for the vast majority of elderly non-rural beneficiaries admitted to a hospital with a primary diagnosis of a heart attack (acute myocardial infarction, or AMI) from 1985 to 1994. They combine that with data on hospital characteristics collected by the American Hospital Association.

They find that, before 1991, competition led to higher costs and, in some cases, lower rates of adverse health outcomes for elderly Americans with heart disease. After 1990, competition led both to substantially lower costs and to significantly lower rates of adverse outcomes. As of 1991, it was approximately 8 percent more costly to be treated in the least competitive fourth of hospital markets, as compared to the most competitive fourth. And, the quality of care in competitive markets was higher as well. Patients in the least competitive fourth of hospital markets experienced approximately 1.5 percentage points higher mortality (that is, were more likely to die) than those in the most competitive areas.

Expressed as a share of 1994 average mortality from AMI in the elderly, competition had the potential to improve mortality by 4.4 percent, the authors find. Patients from the least competitive markets also experienced higher rates of readmission for some cardiac complications, suggesting that the additional survivors attributable to competition in hospital markets were not in especially marginal health.

For two reasons, the authors conclude that increasing HMO enrollment over the sample period partially explains the dramatic change in the impact of hospital competition. First, hospital competition unambiguously improves welfare throughout their sample period in geographic areas with above-median HMO enrollment rates. Second, point estimates of the magnitude of the benefits of competition are uniformly larger for patients from states with high HMO enrollment as of their admission date, as compared to patients from states with low HMO enrollment.

Kessler and McClellan suggest that spillover effects from increasingly efficient treatment of privately-insured patients may have affected the treatment regimen of Medicare patients, by mediating the consequences of hospital competition in a way that enhances medical productivity. In particular, managed care appears to increase efficiency by reducing the tendency of hospital competition to result in a "medical arms race" of expenditure growth - excessive spending on medical care producing minimal benefits for patients.

These findings, the two economists write, are not affected by the structure of the hospital market, such as distance to the nearest hospital, hospital bed capacity utilization, and the characteristics of area hospitals. In future work, they intend to explore whether these findings extend to patients with non-acute illnesses (such as cancer), and to study further the mechanisms through which competition among providers enhances social welfare.

-- David R. Francis