Market Power and Quality: Congestion and Spatial Competition in the Dialysis Industry

Price regulation is an important feature of many health care markets. This paper develops a framework for investigating the role of price regulation in health care provider markets where policy interventions are often marked by tradeoffs between cutting costs, promoting clinical quality and improving access to care. Focusing on the U.S. market for outpatient dialysis I find that market structure affects clinical quality through two channels: Congestion and competition. Due to high travel costs, quality competition is relatively muted. However, as providers become more congested clinical quality suffers. Consequently market structure also affects quality through the allocation of patients across providers. I develop an entry model to endogenize market structure and disentangle these effects. The model is an entry game where dialysis providers make decisions about entry, capacity investment, and clinical quality. I estimate the model using data on approximately 400 million dialysis treatments in the U.S. and conduct counterfactual policy experiments. The results show that local market power allows providers to capture around 90\% of a hypothetical increase in the Medicare reimbursement rate, leaving little pass through to patients in the form of improved quality. A travel subsidy program, which improves the allocation of patients, appears to be a more cost effective way of promoting quality. This proposed program costs the regulator $378 million but improves consumer surplus by $435.