5(40)
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Introduction
Many OECD countries have undertaken market-oriented health care
reforms over the past decades (Gaynor, 2012). Some reforms has been
motivated as a way of increasing consumer choice, while others as a means
of cost control. Introducing market mechanisms into the provision of health
care is assumed to facilitate cost control, by strengthening incentives
for providers to become more efficient (Docteur and Oxley, 2003). At the
same time, it is often argued that the special features of health care have
implications for the scope for competition.
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The development towards
market-oriented reforms therefore raises questions about when and how
competition works on health care markets.
In this paper, I study the effect of competition on prices in a setting where
patients have a substantial cost share (on average about 80%) and prices
for health care services are market determined, namely the Swedish
market for dental care.
One of the main challenges of the empirical literature on competition in
health care is to identify the effect of competition on prices (Gaynor
and Town, 2011). The challenge stems from the endogeneity of market
structure, i.e. that the market structure depends on factors that also affects
prices. If not treated properly, this will yield biased estimates of the effects
of competition on prices. This paper adds to the existing empirical literature
by suggesting a strategy for identifying the effect of competition on prices,
which is grounded in the theoretical literature on competition in health
care. Identification is achieved by exploiting that competition theoretically
has different effects on prices for different types of services due to
differences in consumers’ price sensitivity.
The theoretical starting point for the identification strategy is recognizing
health care as a multiproduct industry. Following Pauly (1978), the
products can be categorized roughly as being either “informative” or
“active-therapeutic”, where consumption of the former precedes and
determines demand for the latter. Consumption can thus be viewed as
taking place in two stages.
The first – informative – stage consists of examinations and diagnostics
(first-stage services) and the second – therapeutic – stage consists of any
subsequent treatments (follow-on services). In general, the same seller
provides both kinds of services. Consumers are on average better informed
about services in the first stage, as they are consumed with some
frequency and are uncomplicated. Consequently, demand is more price
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Arrow (1963) argues that the medical industry differs sharply from the standard
competitive model and that medical care cannot be understood as other “economics
textbook commodities”. This view has been differentiated by e.g. Pauly (1978;
1988) and Shleifer (1998). The special features of health care markets are also
discussed in Dranove and Satterthwaite (2000).
