Quality Competition and Intra-System Substitution in the Hospital Industry

This study examines whether hospital competition and system membership affect revealed quality—quality as reflected in patients' choices—and clinical quality (measured by patient mortality) for patients in an administered price market (Medicare). I develop a model to describe how competition should affect quality when prices are fixed, and how quality choice will be affected when hospitals under common ownership are substitutes for each other. The model suggests that hospitals should set quality higher when the average patient has stronger preferences for other hospitals, but that patients who are very unlikely to visit the hospital should have little effect on quality. Further, hospitals in a system should lower quality to avoid competing with other system hospitals. I test the model using data from south Florida for patients with pneumonia and influenza or COPD in the years 2003–09. The results suggest that revealed quality sometimes follows the hypothesized relationship, and that system hospitals may reduce quality to avoid intra-system competition. However, the effects are not consistent across years or markets. The precise relationship between competition and quality may involve additional effects, such as spillovers from other markets.