Do Competitors’ Quality Improvements Improve Own Quality? An Empirical Test of Florida Hospitals-Panel

Do Competitors’ Quality Improvements Improve Own Quality?
An Empirical Test of Florida Hospitals

For almost two decades, the safety and quality of inpatient care in U.S. hospitals has been of national concern. Efforts to improve these conditions have stemmed mainly from non-market policies and regulation.
Economic theory about the relationship between hospital competition and hospital quality is ambiguous: quality may improve, deteriorate or remain unchanged in response to changes in competition. Empirical research on the relationship between hospital market competition and quality has likewise been inconclusive.
In order to better understand the mechanisms by which market competition leads to quality improvement within hospitals, we investigate whether an observable improvement in the quality of competitors leads to an increase in investment in a hospital’s own quality. We focus on investment rather than measured quality improvement as the outcome, for two reasons. First, outcomes associated with efforts to improve quality are uncertain; not all quality improvement efforts will be successful, or persist. Secondly, it is not clear what length of time is appropriate to expect measurable improvement to emerge from the quality improvement of competitors. However, the more certain and immediate effects of competition will very likely be through the investments hospitals make to improve their own quality of care.

To investigate the relationship between competitor quality and own quality improvement efforts, we use a game-theoretic framework to analyze a panel of all Florida general hospitals from 2004-2015 obtained from Florida’s Center for Health Information and Policy Analysis, a department of the state’s Agency for Health Care Administration. These data include annual hospital inpatient discharge information and financial data. Specifically, we look at the how the quality of competitors, measured by a composite of Agency for Healthcare Research and Quality patient safety (adverse) events, is related to several measures of hospital quality investment, or spending.

We find that, for certain investments, in hospital personnel and wages, there is a beneficial impact from competition within small geographic markets, although the size of the effect is quite small, with estimated elasticities of less than 0.05. Thus, it would seem that the rise of non-market policies from mainly public payers to promote quality (or, to punish poor quality) in U.S. hospitals has been needed to create incentives that are not otherwise provided by market forces.