Gaynor Addresses International Conference on Health Policy
Martin Gaynor, E.J. Barone Professor of Economics and Public Policy at the Heinz School, recently gave the plenary address at the Third International Jerusalem Conference on Health Policy. The talk was titled, "What Do We Know About Competition and Quality in Health Care Markets?" A synopsis of the talk follows. For more information, please visit http://www.kldltd.co.il/nihp/index.html.
Competition in health care is being widely considered as a policy approach to issues of cost and quality in many countries. The advisability of this approach is often hotly debated, but we don't have a lot of systematic evidence on if and how competition affects quality, and whether or not that is to the benefit or detriment of society.
Quality looms large in health care competition. Health care quality is obviously important to individuals, but it also assumes great importance in the market because individuals are largely insulated from health care expenses due to the pervasive presence of health insurance.
Quality in healthcare involves better or worse health, including death. So is it possible to talk about quality being excessive in a healthcare setting since that means that mortality rates might, in some circumstances,be too low? Suggesting that society would be better off - that social welfare would be improved - by increasing mortality rates is not a pleasant prospect. But the same economic concepts apply here as to any other problem of resource allocation. We want to devote resources to reducing patient mortality up to the point where the marginal benefit of reduced mortality is optimal mortality rate that will certainly be greater than zero.
While this may seem repugnant, it is important to realize that there are competing uses for resources and if the value of a reduction in patient mortality is not that great, then it may be better to devote those resources to finding a cure for cancer, school lunches or battleships. It is also important to realize that trade-offs involving mortality risks are made every day. We devote resources to improving traffic and airline safety, but not to the point that the risks of death associated with these activities are zero.
Economic theory is clear that competition increases quality and improves consumer welfare when prices are regulated (for prices above marginal cost), although the impacts on social welfare are ambiguous. When firms set both price and quality, both the positive and normative impacts of competition are ambiguous. The body of empirical work in this area is growing rapidly. At present it consists entirely of work on hospital markets. The bulk of the empirical evidence for patients in markets with regulated prices (e.g.,Medicare) shows that quality is higher in more competitive markets. The empirical results for patients in markets with prices set by providers are mixed -- in some cases competition led to increased quality, while in others quality decreased.
Market-oriented healthcare reforms are being considered or enacted by many countries and the U.S. uses markets for the delivery of care. Policymakers have to decide on reforms and regulation, including competition law, while courts and competition regulators have to make decisions about firms in health care markets. Evidence on the effects of competition on quality in health care is vital to these policy decisions. The scientific evidence in regulated price regimes gives policymakers a "green-ish light" for competition. The evidence is that competition improves quality, although the social welfare effects are unclear. In regimes where prices are set by providers the evidence signals a "yellow light" for competition. The scientific evidence isn't clear on whether competition increases or decreases quality, let alone if this is good or bad. This leaves considerable scope for research to contribute to policy on these issues.
