Quality Competition and Uncertainty in a Horizontally Differentiated Hospital Market

The chapter studies hospital competition in a spatially differentiated market in which patient demand reflects the quality/distance mix that maximizes their utility. Treatment is free at the point of use and patients freely choose the provider which best fits their expectations. Hospitals might have asymmetric objectives and costs, however they are reimbursed using a uniform prospective payment. The chapter provides different equilibrium outcomes, under perfect and asymmetric information. The results show that asymmetric costs, in the case where hospitals are profit maximizers, allow for a social welfare and quality improvement. On the other hand, the presence of a publicly managed hospital which pursues the objective of quality maximization is able to ensure a higher level of quality, patient surplus and welfare. However, the extent of this outcome might be considerably reduced when high levels of public hospital inefficiency are detectable. Finally, the negative consequences caused by the presence of asymmetric information are highlighted in the different scenarios of ownership/objectives and costs. The setting adopted in the model aims at describing the up-coming European market for secondary health care, focusing on hospital behavior and it is intended to help the policy-maker in understanding real world dynamics.