Who benefits when lock-in is reduced? Competition, quality and returns to skill in the health care market

In health care markets, reductions of inertia in consumer choices may lead to greater incentives for firms to increase quality. With non-perfectly substitutable inputs, hospitals could increase their quality by demanding better technology or better physicians. However, because only persons with a medical license are authorized to practice medicine, in the short run the elasticity of supply of high quality physicians is relatively inelastic. Therefore, an increase in the demand for high quality physicians would lead to an increase in their relative wages without increasing their total hour of works. I assess these predictions using a quasi-experimental setting in the Uruguayan health care system to analyze the effects of increased competition via lock-in reductions on a market for inputs. The Uruguayan health care system has three features that provide an excellent setting to identify these effects. First, insurance companies and hospitals are completely vertically integrated and consumers receive all their health care from the hospital they have chosen. Second, physicians are hired by hospitals and they receive a wage for their worked hours. Finally, after nine years of complete lock-in, the government reduced the lock-in of consumers, increasing the competition in the market. I use administrative records on wages and hours of work in all hospitals for all specialists in the Uruguayan health care system. I combine these administrative records with data on the scores that specialists obtained in the test they have to take to be admitted into the medical specialty, which I use as an exogenous measure of quality of specialists. Up to 2010, there was only one school that offered medical specialties, so I use the data on test scores for the cohort of graduate medical school applicants between 1996 and 2010 (about 70% of total specialists) to analyze the effects of the increased competition on their wages and hours of work. Consistent with the idea of an inelastic relative supply in the short run, I show that the increased competition shifted the relative demand for high quality medical specialists, increasing their relative wages but without strong evidence of an increase in quality, approximated as relative hours of high quality over lower quality physicians.