Hospital competition when patients have different willingness to pay for quality Paper by Mario Pezzino Presentation By Boris Houenou

Motivation Hospital competition ( based on Hotelling and Salop Models) ignored individual heterogeneity in WTP for quality or assume inelastic demand and symmetry in location Isn’t a quality competition with such assumption just a variety competition? The reality is that for many reasons( tastes, income), patients exhibit heterogeneity in WTP for quality Also price containment in healthcare industry became policy concern and third party payment is common. PP( pure preferred) and FRR(Fixed Reimbursement Rate) reimbursement studied in this paper

Research questions What is the equilibrium outcomes when hospitals compete for price and quality and patients are heterogeneous toward WTP for quality? How does the introduction of preferential provider agreements affect patients’ surplus, demand coverage, quality provision and total payments to the hospital system when patients have heterogeneous preferences with respect to quality?

Main assumptions Fixed quality-dependent costs Elastic demand Demand measures 1 and all patients have care coverage Individual heterogeneity of WTP for quality t uniformly distributed on its support with density equal to one Patients have same illness???? But different surplus depending on quality level provided Two identical hospitals: offer the same treatment BUT quality differentiated. Qualities are observable ???but not contractible

Model

Results ( FRR plan)

The high quality provider in equilibrium will charge higher prices, serve a higher number of patients and earn higher profits. In addition, prices, profits and total payments to the hospitals are all decreasing in c.

Results ( FRR plan) The high quality provider in equilibrium will charge higher prices, serve a higher number of patients and earn higher profits. In addition, prices, profits and total payments to the hospitals are all decreasing in c.

Results ( PP plan when the low quality Hospital is preferred s2 > s1 )

Results ( PP plan when the high quality Hospital is preferred s1 > s2 )

Results ( PP plan when the high quality Hospital is preferred)

Results ( Equilibria comparison)

Result( Minimum standard effect)

Result( Minimum Quality Standard effect)

Contribution and weakness Applied theoretical paper built on Vandenbosch paper: 2 dimensions of differentiation: variety and quality with heterogeneous WTP Offer realistic analysis of the third party payment system Combine both quality, elastic demand and payment system analysis Analyzes prices, qualities, welfare and public reimbursements, and regulation in one paper

Contribution and weakness Assume horizontal differentiation The direction of the location may matter Assume same illness for all patients???? Assume uniform quality and demand Offer a not dynamic/repeated game framework as response to quality of opponent Simultaneous choice of prices, qualities and payment terms is unrealistic Negative profits in hospitals is admissible if we consider that they are semi- altruistic MQS could be a way to regulate entry of bad hospitals or give incumbent entry deterrence leverage Quality observable? Hardly by the Regulator or not at all by patients

Conclusions For policy-makers, there is a trade-off. If he is benevolent maximizing patient welfare maximization, then both providers should be treated equally If regulator value more public budget, is more concerned with the level of to hospitals or with the degree of market coverage then it might be necessary to consider specific situations, since the regulator might have to face a trade-off between total welfare and the level of total payment (or market coverage).

Q&A Under which conditions the assumption that individuals have same illness portrays the reality? Outbreak? Or seasonal flu? In multi-dimension differentiation, If firms are symmetric in quality, can we just ignore the quality dimension analysis and focus on variety analysis?