Competition and Pricing Behavior in Long-Term Care Markets: Evidence from the Market for Assistance in Daily Housekeeping Activities

This paper aims to expand the limited knowledge about how competitive forces shape the pricing behavior on markets for long-term care services, using a unique data set on the Dutch market for assistance in daily housekeeping activities (ADHA). This type of long term care services has been decentralized to municipalities as of 2007. As many municipalities chose not to regulate prices in their procurement process, we have market-determined price data for more than 150 local markets (of just over 400 Dutch municipalities in total) for the period 2009-2013.

Our identification strategy relies on the exogenous variation in the market shares in the first month after decentralization. This period can be seen as a mere transition phase, as existing users retained the right to receive ADHA from the very same provider as before the decentralization. Market shares in January ’07 are thus exogenous to any market developments in the years thereafter. Moreover, the January ’07 market share is a strong instrument as it turns out to be substantially correlated with market shares in later years, despite the relatively high entry rates during this period.

Focusing on the most common form of ADHA (‘basic ADHA’), we obtain that a provider’s market share has a positive and significant effect on the price received. The average market leader in a municipality – possessing a 65 percent market share – secures a price that is 2.1 percent above the price of an atomistic provider. Translating this result to the overall market level tells us that the average price on the market decreases by 0.5 percent as the market becomes 10 percent less concentrated. When viewed in light of other studies on market power in care markets, this effect is considered small to moderate.

Our study thus shows that high degrees of market concentration do not hinder competitive pressures on suppliers’ pricing behavior per se. A plausible explanation for this outcome is that incumbents face a serious threat of entry by newcomers, an idea that is backed by the observation that new providers enter relatively easy into the local markets. This also indicates that in order to stimulate competition on health care and long-term markets, lowering entry barriers might be more important than bringing the level of market concentration below some threshold value.

Zooming in on our main outcome, we show that the small but significant effect of market size on price is merely driven by the pricing behavior of for-profit providers: while for this type of provider the average market leader receives a prices that exceeds the price of an atomistic supplier by 2.7 percent, there is no systematic relation between size and price for non-profit organizations. From this, we cannot conclude that the entry of for-profit suppliers has led to higher prices, as for-profits may be more efficient than non-profits. Still, the result indicates that the extent to which market concentration influences price formation may very well depend on the ownership composition at the supply side.