Productivity and competition in health care markets

Abstract

This thesis presents three empirical studies based on regulatory and institutional changes in the US hospital and pharmaceutical industries. Chapter 2 reports the results of an empirical study on changes in quality of health care after hospitals have undergone ownership conversions. Theoretical work on not-for-profit institutions has hypothesized that not-for-profit firms exist as a response to high contracting costs in markets with asymmetric information. If a firm knows more than its customers about the quality of the goods or services it sells, then the firm could cut costs by delivering lower-quality goods than it promises. Not-for-profit organizations serve as a solution to this problem by allowing managers to hold the firms in trust for their customers. Using readmission and mortality rates for heart and stroke patients as measures of quality of care, I find increases in mortality rate as well as readmission rate for heart attack patients after not-for-profit to for-profit conversions and after public to not-for-profit conversions. The deterioration in health care quality did not seem to be attributable to changes in the patient pool, but may be associated with changes in the number of procedures performed. The reduction in care for the uninsured after not-for-profit to for-profit hospital conversions may also point to the importance of legal enforcement and oversight as well as private contracts in ownership transfer. Chapter 3 considers altruistic behavior by not-for-profit, for-profit and public hospitals. Economic theories have hypothesized that not-for-profit organizations act in response to insufficient provision of social or collective consumption goods by private for-profit entities or by the government. I find support for not-for-profit hospitals behaving in an altruistic manner. Nevertheless, there is mixed evidence of both pure and impure altruism for not-for-profits. Similarly, public hospitals also exhibit behavior consistent with both pure and impure altruism. During the period of May 1995-June 1997, four former prescription-only drugs (Pepcid, Tagamet, Zantac and Axid) were introduced to the nonprescription market. Chapter 4 reports the impact of these introductions on thirteen similar incumbent products in the nonprescription drug market. I also analyze firms' use of advertising to compete and to increase demand for their products.