Competition : Healthcare

"This article  is adapted and summarized from a newly introduced healthcare strategy course by HBS." Next Article will Discuss Value Creation & Value Capture in a competitive healthcare market"          

We will explore how competition among healthcare providers increases quality, reduces prices, and can increase a provider’s reach, and the ways that regulatory authorities can intervene to protect and preserve competition.

IS COMPETITION GOOD FOR HEALTH CARE?

From an economic standpoint, competition yields the most efficient outcomes when:

° Access to information is complete and symmetric for all market participants (i.e., buyers and sellers).

° There are a large number of buyers and sellers for all products and services, and the products and services are well-defined (or standardized).

° It is easy for firms to enter and exit the market.

° Market participants behave rationally.

• Case 1: The English NHS introduced competition by allowing patients to choose their providers for certain procedures, providing patients with information on provider quality, and paying providers based on the number of patients who chose them. These reforms encouraged hospitals to improve the quality of care they provided in order to attract patients and maintain or increase revenue.

° The English NHS saw quality (as measured by AMI mortality) improve more in hospitals that competed for elective surgery patients.

• Firms generally compete using one of two strategies:

° Compete on cost, by continually focusing on lowering costs or containing cost growth. This is rare in US health care markets.

° Compete on benefits, usually by either focusing on a subset of products or services (e.g., Mister Car Wash, Advanced Fertility Care), or by offering a broader range of services to a targeted customer group (e.g., Patagonia, Oak Street Health). 

• Case 2: Geisinger focused on improving the quality of the health care it delivered for common, high-cost procedures with highly variable outcomes in its Proven Care program.

° To do this, Geisinger operationalized best practices to provide consistently high quality care and predictable prices.

° This approach appealed to large employers like Walmart, which contracted with Geisinger (and other providers) as Centers of Excellence (COE) for a destination medicine program.

° This destination care was supported by third-party administrators (TPAs). The TPAs also facilitated sharing of quality information among COEs and employers.

° Destination care allowed Geisinger to compete outside its local geography by making its high-quality care available to patients across the US.

° The program motivated Geisinger non-COE physicians as well as non-COE providers across the country to improve their quality.

• Case 3: US insurers have used narrow networks, high-deductible health plans, and reference pricing to get better value per dollar spent on health care. CalPERS’ reference pricing approach placed a ceiling (the reference price) on how much it would pay for specific procedures.

° Patients could choose any in-network provider, but had to pay the difference between the hospital’s price and the reference price out-of-pocket.

° Patients shifted toward initially lower-priced providers, and higher-priced providers eventually reduced their prices for CalPERS patients.

• Common features of all cases:

° Providers are competing to deliver shoppable services that are well-defined and can be scheduled in advance.

° Patients have a choice of providers.

• Provider price transparency, quality transparency, or both, are available, allowing patients and payers to make better choices, and rewarding providers that offer the highest value.  

REGULATION CAN PROTECT COMPETITION

• Maintaining competition is a way of sustaining competition across suppliers in price and quality, and encourages innovation.

• Given its benefits, competition agencies and regulators actively work to preserve and protect competition.

• Case 4: A proposed merger between Reading Health System (RHS) and Surgical Institutes of Reading (SIR) was contested by the FTC and the Attorney General of Pennsylvania.

• To determine how a merger will impact competition in a market, competition agencies consider the geographic market area for the service or services being offered, and might contest a merger if:

° There are a small number of competitors.

° The merging entities had been vigorous competitors.

° New entrants are unlikely to arrive to restore competition post-merger.

° The merger is not likely to produce significant efficiencies that could be passed through to consumers in sufficient magnitude so as to offset the projected harm to competition.

• Competition agencies also consider the size of the merging entities relative to the others in the market.

• Market shares can be used to determine the competitiveness of a market in a quantitative way:

° Concentration ratios (CRs) are calculated by summing the market shares of a specified number of leading firms, e.g., CR2 is the sum of the market shares for the two leading firms.

° The Herfindahl-Hirschman Index (HHI) is calculated by summing the squared market shares for all suppliers in a market:

• Agencies look at two thresholds related to the HHI in determining whether a merger is likely to be anti-competitive. These thresholds are accurate as of 2022:

° The post-merger HHI exceeds 2500 points.

° The merger or acquisition increases HHI by more than 200 points.

• There are limitations to the HHI as a measure of competition:

° It is highly sensitive to the market definition.

° It does not consider differentiation among competitors within the market.

• In the case of the merger between RHS and SIR, competition agencies considered four markets and found that both thresholds were met in all four, so the merger was abandoned. 

CHANGES IN REGULATION CAN AFFECT THE COMPETITIVE LANDSCAPE

• Suppliers in an industry often differentiate their products. Two key types of differentiation are vertical and horizontal:

° Vertical differentiation is about offering a feature (or more/less of a feature) that most everyone likes (or dislikes).

° Horizontal differentiation is about offering features that potential purchasers value differently (such as location).

• Case 5: Nursing homes In the US vertically differentiate themselves by offering different staffing levels (more staff = better patient experience, better outcomes). Ohio and California passed regulations increasing the minimum required nurse-to-patient ratio for nursing homes (to levels above the federal requirement).

° In areas that had many homes below the new minimum, nursing homes with staff at or above the minimum also increased their staff, providing evidence that nursing homes engage in vertical differentiation. As the lower-end homes increased their staff, they encroached on the higher-end homes’ positions. The higher-end homes sought to maintain their position by adding more staff.

° Minimum staffing regulation also changed the competitive landscape in other ways:

» Supplier power, the power of substitutes, and rivalry may have increased.

» The threat of entrants likely decreased.

» Buyers no longer had the option of buying lower-quality care.

• The consequences of regulations can vary depending on the nature of competition in the regulated industry. Policymakers must consider the competitive environment when evaluating potential policy changes. 

Related Post : NHS Case Study