THERE IS A COMMON PERCEPTION that the health care industry is different from other sectors of the economy and that it is inoculated from the discipline of demand-side competition. Patients are believed to be operating in the dark and not selecting hospitals based on outcomes.

That perception is challenged by a new research paper co-authored by Harvard Kennedy School Professor Amitabh Chandra and published in the American Economic Review.

Through an examination of several years of Medicare records, Chandra and his fellow researchers uncover evidence that the healthcare sector may have more in common with others than is commonly assumed in the degree to which it is subject to traditional market forces.

“The conventional wisdom in the health care sector…is that idiosyncratic, institutional features of this sector dull or eliminate these competitive reallocation forces,” the authors write. “Oft-cited culprits include consumers who lack knowledge of or time to respond to the quality and price differences across providers, generous health insurance which insulates consumers from the direct financial consequences of their health care consumption decisions, and public sector reimbursement which provides little incentive for providers to achieve productive efficiency.”

The analysis focused on the allocation of Medicare patients for several different health conditions, which together account for almost 20 percent of total Medicare hospital admissions and hospital spending. 

“For all of these conditions, we find robust evidence that higher performing hospitals—as measured by risk-adjusted survival, risk-adjusted readmissions, and adherence to well-established clinical practice guidelines—tend to attract greater market share at a point in time and to grow more over time,” the researchers concluded. “The one exception to this favorable pattern of reallocation is that hospitals which score better on ex post measures of patients’ satisfaction with their experience (such as whether the room was quiet) do not attract greater market share.”

The researchers also identified a stronger relationship between performance and market share for those patients who have greater scope for their hospital choices.

“Such findings suggest that, going forward, research on the determinants of performance in the health care sector may benefit from more attention to the insights, both theoretical and empirical, from research about productivity and allocation in other industries. By the same token, the health care sector may likewise be a useful laboratory for insights about other industries,” the authors argue.

The paper is co-authored by Amy Finkelstein, MIT; Adam Sacarny, Columbia University Mailman School of Public Health; and Chad Syverson, Chicago Booth.

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