Competition, Payers, and Hospital Quality1

Abstract

To estimate the effects of competition for both Medicare and HMO patients on the quality decisions of hospitals in Southern California. Secondary discharge data from the Office of Statewide Health Planning and Development for the State of California for the period 1989–1993. Outcome variables are the risk-adjusted hospital mortality rates for pneumonia (estimated by the authors) and acute myocardial infarction (AMI) (reported by the state of California). Measures of competition are constructed for each hospital and payer type. The competition measures are formulated to mitigate the possibility of endogeneity bias. The relationships between risk-adjusted mortality and the different competition measures are estimated using ordinary least squares. The study finds that an increase in the degree of competition for health maintenance organization (HMO) patients is associated with a decrease in risk-adjusted hospital mortality rates. Conversely, an increase in competition for Medicare enrollees is associated with an increase in risk-adjusted mortality rates for hospitals. In conjunction with previous research, the estimates indicate that increasing competition for HMO patients appears to reduce prices and save lives and hence appears to improve welfare. However, increases in competition for Medicare appear to reduce quality and may reduce welfare. Increasing competition has little net effect on hospital quality in our sample.