Does price deregulation in a competitive hospital market damage quality?

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ContentslistsavailableatScienceDirect

Journal

of

Health

Economics

jo u rn al h om ep age :w w w . e l s e vi e r . c o m / l o c a t e / e c o n b a s e

Does

price

deregulation

in

a

competitive

hospital

market

damage

quality?

Anne-Fleur

Roos

a,∗

_,

_Owen

_O’Donnell

b

_,

_Frederik

_T.

_Schut

c

_,

Eddy

Van

Doorslaer

d

_,

_Raf

_Van

_Gestel

e

_,

_Marco

_Varkevisser

c

a_Netherlands_Bureau_of_Economic_Policy_Analysis_(CPB)_&_Erasmus_School_of_Health_Policy_&_Management_(ESHPM),_Erasmus

UniversityRotterdam(EUR),Netherlands

b_Erasmus_School_of_Economics_(ESE)_&_ESHPM,_EUR,_Tinbergen_Institute_(TI),_Netherlands c_ESHPM,_EUR,_Netherlands

d_ESHPM_&_ESE,_EUR,_TI,_Netherlands e_ESHPM_&_ESE,_EUR,_Netherlands

a

r

t

i

c

l

e

i

n

f

o

Articlehistory: Received17April2018

Receivedinrevisedform14April2020 Accepted18April2020

Availableonline23May2020 JELclassiﬁcation: I11 L14 L15 Keywords: Healthcare Hospital Competition Quality Contracting

a

b

s

t

r

a

c

t

Regulatorsmaybehesitanttopermitpricecompetitioninhealthcaremarketsbecauseof itspotentialtodamagequality.Weassesswhetherthisfeariswellfoundedbyexamining areformthatpermittedDutchhealthinsurerstofreelynegotiatepriceswithhospitals. Unlikepreviousresearchonhospitalcompetitionthathasreliedonqualityindicatorsfor urgenttreatments,wetakeadvantageofaplausibleabsenceofselectionbiastoidentifythe effectonthequalityofelectiveproceduresthatshouldbemorepriceresponsive.Usingdata onalladmissionsforhipreplacementstoDutchhospitalsandadifference-in-differences comparisonbetweenmoreandlessconcentratedmarkets,weﬁndnoevidencethatprice deregulationinacompetitiveenvironmentreducesqualitymeasuredbyhipreplacement readmissionrates.

1. Introduction

Competitionbetweenhealthcareprovidersis

increas-inglyencouragedwiththeaimofimprovingqualityofcare

whileslowingthegrowthofhealthspending.Whenprices

areregulated,providersareforcedtocompeteonquality

toattractpatientsorcontractswithinsurers.Whenprices

∗ Correspondingauthor.

E-mailaddresses:a.f.roos@cpb.nl(A.F.Roos),odonnell@ese.eur.nl (O.O’Donnell),schut@eshpm.eur.nl(F.T.Schut),vandoorslaer@ese.eur.nl (E.VanDoorslaer),vangestel@ese.eur.nl(R.VanGestel),

varkevisser@eshpm.eur.nl(M.Varkevisser).

areunregulated,theeffectofcompetitiononqualityisless

clear.Ifdemandismoreresponsivetopricethantoquality,

thentheoptimalcompetitivestrategywillinvolvedriving

downthepriceandsacriﬁcingquality(Gaynor,2006).This

isaplausiblescenariowheninformationonqualityispoor.

Fearthatcompetitionwithunregulatedpriceswillbe

dam-agingtoqualitymaymakeregulatorswaryaboutallowing

healthcareproviderstocompeteonprice.However,itisnot

clearwhetherthisfeariswellfounded.Providersmaynot

adopttheproﬁtmaximizingcompetitivestrategies.

Not-for-proﬁtgoals,asocialmissionandintrinsicmotivation

mayleadthemtomaintainqualityevenifthismeans

for-goingopportunitiestogain a competitiveadvantage by

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cuttingpricesattheexpenseofquality.Whetherquality

suffers in competitivehealthcare marketswith

unregu-latedpricesisanempiricalquestion.Evidencetoanswer

itissparse.

Thispaperexaminestheimpactofpricederegulation

on the quality of hospital care delivered in the Dutch

healthcare market in which insurers compete for

cus-tomersandhospitalscompeteforcontractswithinsurers.

Weestimatetheeffectofmovingfromﬁnancinghospitals

throughprospectiveglobalbudgetstoallowinginsurers

andhospitalstofreelynegotiateprocedure-speciﬁcprices

in contractsfor the deliveryof DRG-type products.We

identifytheeffectofthispricederegulationbyexploiting

variationinitsconsequences acrosshospitals

differenti-atedby theconcentration of themarket in which they

operate.Assumingthatfreeinsurer-hospitalnegotiationof

pricescreatesgreatercompetitivepressurewherethe

mar-ketislessconcentrated,thedifference-in-differences(DID)

betweenmoreandlessconcentratedmarketscanidentify

alowerboundontheeffectofderegulatingpricesinamore

competitiveenvironment.

Weestimatetheeffectofpermittingpricecompetition

onan elective procedurequality indicator– unplanned

readmissionafternon-acutehipreplacement.Higher

read-missionratesfollowinghipreplacementhavebeenshown

toberelated tosuboptimal quality(Rosen et al.,2013;

Mokhtaret al.,2012).Theinstitutional context and our

empiricalstrategyfacilitateidentiﬁcationwithoutrunning

muchriskoftheselectionbiasthatmostotherstudiesof

competitioninhealthcaremarketshaveavoidedonlyby

estimatingeffects onindicatorsof thequalityofurgent

treatments,suchasmortalityafteracutemyocardial

infarc-tion(AMI)(e.g.Kessler&Geppert, 2005; Propperetal.,

2008;Cooperetal.,2011;Mutteretal.,2011;Romano& Balan,2011;Gaynoretal.,2013).1_This_restriction_of

atten-tiontourgenttreatmentsleavesadearthofevidenceonthe

effectofcompetitionontreatments,suchaselective

surg-eries,thathospitalsdirectlycompeteforandthedemand

forwhichpotentiallyexhibitsmuchgreaterresponsiveness

topriceandquality(BevanandSkellern, 2011;Gravelle

etal.,2014;Collaetal.,2016;Skellern,2019).Thereform

weexploit permittedprice competitionbut leftpatient

choiceof provider effectively unconstrained. There was

noavailableinformationonhipreplacementreadmission

rates,andsopatientscouldnotselecta hospitalonthe

basisofthisoutcome.Toidentifytheeffect,weseparate

hospitalsintotwobroad(treatment/comparison)groups

accordingtotheconcentrationofthemarketinwhichthey

operate.Iftherewere anyselectioncorrelated withthe

outcome,itwouldmostlikelyinvolveswitchingbetween

1 _The_urgency_of_AMI_treatment_greatly_reduces_the_risk_of_selection_bias

sincepatientsaresimplytakentothenearesthospital.Thereislittleorno opportunityfordifﬁcult-to-treatpatientsselectinghospitalsthatdeviate fromtheaverageinbothqualityandexposuretocompetition.Andthere islittlescopeforthosehospitalstocherrypicktheeasiercases.However, thisempiricalstrategyidentiﬁestheimpactofcompetitiononquality onlyinsofarasthepressuretocompeteinthedeliveryoftreatments thatarepriceand/orqualityresponsiveaffectsthegeneralmanagement ofahospitalandthisfeedsthroughtotreatments,suchasAMI,thatare largelyshieldedfromcompetition.

neighboringhospitalsthatbelongtothesamegroup.This

wouldnotinduceselectionbias.Baselinepatient(casemix)

characteristicsaresimilaracrossthetreatmentand

com-parison groups, changes in these characteristicsdo not

differbetweenthegroupsandconditioningonthese

char-acteristicshaslittleimpactontheestimates.

Weﬁndnoeffectonqualitydespiteexamininga

situ-ationinwhichpricederegulationhadthegreatestscope

todamagequality–anelectiveprocedurewithlittle

infor-mationonitsquality,potentiallyleaving thedemandof

insurer-purchasersmoreresponsivetopricethanto

qual-ity. Overa ﬁve-yearperiodafterpricederegulation,the

changeinthe90-dayhipreplacementreadmissionrates

of hospitalsin less concentrated markets didnot differ

signiﬁcantlyfromthatofhospitalsinmoreconcentrated

marketsthatwereexposedtolesscompetitivepressure.

Theinsigniﬁcantpointestimateissmallinmagnitude–less

than1percentofthepre-reformreadmissionrate–and

reasonablypreciselyestimated.Failuretorejectthenullof

noeffectisrobusttoalternativedeﬁnitionsofthemarket,

tocomparinghospitalsattheextremesofmarket

concen-tration,tousingthe30-day(insteadof90-day)readmission

rate,todroppingthemostruralhospitalsandtousing

read-missionafterkneereplacementasthequalitymeasure.In

theyearimmediatelyafterpricederegulation,weﬁnda

marginallysigniﬁcantnegativeeffectonthereadmission

rate,whichisfollowedbyinsigniﬁcantpositivepoint

esti-matesin later years.This hintsata positive immediate

impactonqualitythatisnotsustainedwhenhospitals

con-tinuetobeexposedtocompetitivepressuresarisingfrom

pricederegulation.Overall,this studyﬁndsnoevidence

thatpricederegulationinamorecompetitivehealthcare

marketdamagesquality,evenwheninformationonquality

ispoor.

2. Competitionandhealthcarequalitywith unregulatedprices:theoryandevidence

Whenpricesareunregulated,theimpactofcompetition

onqualitydependsonhowitaffectstheresponsivenessof

demandtoqualityrelativetoitsresponsivenesstoprice.If

consumers,orinsurerspurchasingontheirbehalf,observe

pricesbuthaveonlyimperfectinformationonquality,then

competitionmightbeexpectedtoraisethepricesensitivity

relativetothequalitysensitivityofdemand,andsoreduce

quality(Kranton,2003).Gaynor(2006)makesthis

argu-mentusinganamended versionoftheDorfman-Steiner

condition(DorfmanandSteiner,1954):=p

d εz

εp,wherezis

quality,pisprice,disthemarginalcostofquality,εz is

theelasticityofdemandwithrespecttoqualityandεpis

theelasticitywithrespecttoprice.2_If_competition_exerts

downwardpressureonthepricerelativetothemarginal

costand/orraisesthemagnitudeofthepriceelasticity

rel-2_Although _Dorfman _and _Steiner ₍₁₉₅₄₎ _model _a _{monopolist’s}

behaviour, Dranoveand Satterthwaite (2000) show thatthe model providesanapproximationtothebehaviourofanoligopolisticor monop-olisticallycompetitiveﬁrmifwethinkofthedemandfunctionasareduced form.Hence,themodelhasrelevanceforimperfectlycompetitive health-caremarkets(Gaynor,2006;Gaynoretal.,2015).

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ativetothequalityelasticity,thenitwillreducequality (Gaynoret al.,2015).3 _However,_if_quality_is_{sufﬁciently}

observable,thencompetitioncouldconceivablyraisethe

quality elasticity relative to theprice elasticity.Quality

wouldincrease,providedpricedoesnotfallrelativetothe

marginalcostofquality.Theeffectofcompetitionon

qual-itywithanunregulatedpriceisthereforeambiguous.It

dependsoncharacteristicsofthemarket,theobservability

ofqualityandtheobjectivefunctionsofthedemand-side

and supply-sideagents –insurersand hospitals

respec-tively(Gaynoretal.,2015).

Evidence on theeffect of competition on healthcare

quality when prices are unregulated is scarce.4 _This _is

mainlybecauseonlyafewcountriespermitfreeprice

nego-tiationinhealthcaremarketsanddataontheperformance

ofprivatehealthcareprovidersaretypicallynotaccessible.

UsingdatafromSouthernCalifornia,Gowrisankaranand

Town (2003)ﬁndthatincreasedcompetitionfor Health

Maintenance Organization (HMO) patientsis correlated

with reduced risk-adjusted hospital mortality for both

pneumonia and AMI. Consistent with this, Sari (2002)

ﬁndsthatlowerhospitalmarketconcentrationin16US

states is associated with fewer hospital complications.

However, the internal validity of these studies can be

doubted becauseof endogeneity problems (Gaynor and

Town,2012),andtheirexternalvalidityislimitedbecause

theHMOmarketsstudiedareveryparticulartotheUS

hos-pitalmarketinthe1990s.

Thefewstudiesthatexploitapolicychangeto

iden-tifythequalityeffectofsomeformofpricederegulation

arestrongerwithrespecttointernalvaliditybutalso

dif-ﬁculttogeneralizebecausetheﬁndings areobtainedin

speciﬁcsettingswithaparticulardesignofprice

competi-tion.Subjecttothiscaveat,thesestudiesgenerallyﬁndthat

permittinggreaterpricecompetitiondoesdamage

hospi-talquality.Volppetal.(2003)compareAMImortalityrates

ofNewJerseyhospitalsbeforeandafterthederegulation

ofpricesin1992withthoseofNewYorkhospitalswhere

there wasno deregulation. The mortality rateof

unin-suredAMIpatientsincreasedinNewJerseyrelativetoNew

York.However,coincidenttothereforminNewJerseyand

potentiallyconfoundingitseffect,hospitalpriceswerealso

pressuredthroughrapidgrowthoflarge-volumebuyers,

suchasHMOs,andtherewerelargereductionsinsubsidies

forhospitalcareofuninsuredpatients.

Theswitchfromﬁxedbudgetsthathospitalsreceived

directlyfromthenationalgovernmenttocontracts

hospi-3_It_is_unlikely_that_hospitals_deliberately_set_out_to_lower_quality_of

care.Studiesthatinvestigatethecompetition-qualityrelationshipoften arguethatinresponsetocompetitivepressurehospitalsmaycutservices thataffectqualityoutcomes(Propperetal.,2008;Bloometal.,2015). GaynorandTown(2012)showthat,forthepurposeofmodeling,itdoes notmatterwhetherhospitalsareassumedtochoosequalitydirectlyor indirectlythrougheffortexerted.

4_There_is_more_evidence_on_the_impact_of_competition_on_healthcare

qualitywhenpricesareregulated.Findingsaremixed.Somestudiesfind thatcompetitionimprovesqualityinthiscontext(KesslerandMcClellan, 2000;KesslerandGeppert,2005;Cooperetal.,2011;Gaynoretal.,2013; Gaynoretal.,2016;GobillonandMilcent,2017).Othersfindevidenceof thecontrary(Moscellietal.,2019;Skellern,2019),whileonestudyfinds noeffectatall(Bertaetal.,2016).

talsnegotiatedwithpurchasingorganizationsintheBritish

NationalHealthServicein1991hasbeenusedtoestimate

thequalityeffectofahighlyregulatedformofprice

compe-tition(Propperetal.,2004;Propperetal.,2008).Contracts

werewrittenforblocksofservices,includingaccidentand

emergencyproceduresandnotfordeﬁnedproducts,such

asDRGs.Hospitalsweremandatedtosetpriceequal to

averagecost,hadtopublishthesepricesandwerenot

per-mittedtocarrysurplusesorlossesacrossﬁnancialyears.A

limiteddegreeofpricecompetitionwaspossibleatthe

spe-cialtylevelbecauseofthedifﬁcultyofcheckingadherence

tothepricingruleatthatlevel(Propperetal.,2008).The

evidencesuggeststhateventhisregulatedformofprice

competitionhadanegativeimpactonquality(measured

byAMImortalityrates),whichisattributedtohospitals’

incentivestocompeteonpriceratherthanqualitywhen

theavailableinformation onthelatter ispoor(Propper

etal.,2004;Propperetal.,2008).

Ifthehighlyregulatedformofpricecompetition

per-mittedin theUKcoulddamagequality,thenonemight

anticipatethatallowinghospitalstofreelynegotiateprices

withpurchasers would be seriouslydetrimental to the

quality of care deliveredin more competitive markets.

The2005reform oftheDutchhospital marketprovides

anopportunitytotestthis conjecture. Sincethere were

nopublishedoutcome indicators of qualityavailable to

patientsandhealthinsurersbeforeandafterthereform,

theriskofanegativeimpactonqualitywassubstantial.

Particularlyin morecompetitivehospitalmarkets,price

deregulationmayhaveraisedthemagnitudeoftheprice

elasticityrelativetothequalityelasticityandsomayhave

reducedquality.

3. PricederegulationintheDutchhospitalcare market

Comprehensive health insurance in the Netherlands

withverylimitedcostsharingleavespatientsinsensitiveto

priceandplausiblymoreconcernedaboutquality.5

How-ever,asDutchhealthinsurerscompeteonthepricesofthe

packagestheyoffer,theyarelikelytobemoresensitive

tothepricesofhealthcareproductsthanpatients.6 _After

pricederegulationin2005,insurershad anincentiveto

pushpriceslowerinnegotiationswithhospitalsandwere

possiblymoreconcernedaboutpricethanquality.Thiswas

strengthenedbythelackofoutcome-basedquality

indica-tors–onlyalimitedsetofstructure-andprocess-based

indicatorswasavailableatthetime.Ifbetterinformation

5 _In_the_speciﬁc_context_of_our_study,_prices_of_hip_replacements_exceed

thedeductible,whichistheonlyformofcost-sharing.Forthis proce-dure,out-of-pocketcoststopatientsare,therefore,invarianttotheprices chargedbyhospitals.

6 _The_scenario_we_examine_is_similar_to_that_captured_by_a_two-stage

modelinwhichinsurers(ManagedCareOrganizations)andhospitals ﬁrstnegotiateprices,andthenpatients,whoareexposedtolittlecost sharing,selectahospital(Cappsetal.,2003;TownandVistnes,2001; Gowrisankaranetal.,2015).TheestimatesGowrisankaranetal.(2015) obtainfromsuchamodelimplythattheinsurersaremuchmoreprice sensitivethantheinsuredpatients,buttheinsurersarelesspricesensitive thanpatientswouldbeiftheywereuninsured.

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onqualityhadbeenavailable,theninsurers,presumably,

wouldhavebeenmoreresponsivetoit.

AllDutchhospitalsareprivatenonproﬁtfoundations

facinga legallybindingnon-distributionconstraint

pro-hibitingthemfromdistributinganynetearnings.Before

2005,thehospitalswereﬁnancedbyaprospective

bud-getingsystemwithregulatedperdiemratesthatproduced

relativelystablerevenueﬂowsknownatthebeginningof

eachyear.From2005,hospitals’revenuesbecame

contin-gentoncontractssecuredwithindividualhealthinsurers.

Atthattime,therewereﬁvehealthinsurancecompanies,

plusajointpurchasingcooperativeofsmallerinsurers.7

Contractsarewrittenforproductsdeﬁnedbyapurposively

developedproductclassiﬁcationsystem–Diagnosisand

TreatmentCombinations (DTCs)– akintoDRGs.8 _These

productsbearnorelationtotheoutputparametersofthe

pre-reformhospitalbudgets(e.g.number ofadmissions

andhospitaldays)andtheproduct-speciﬁcpricesarenot

relatedtotheregulatedperdiemratesthatwereusedtoset

thesebudgets.Forallproducts,hospitalsandinsurersare

permittedtonegotiateovervolumewhiletakingaccountof

quality,althoughintheperiodwestudytheattentionthat

couldbepaidtoqualitywashamperedbythelackof

out-comeindicators.9_For_some_products,_free_{insurer-hospital}

negotiationofpriceswasallowed.In2005,thiswas

permit-tedforasubsetofproductsthataccountedforabout10%

ofhospitalrevenues.Thissubsetincludednon-acutehip

replacements–theprocedurewefocuson.Overtime,the

numberofproductsforwhichfreepricesettingis

permit-tedhasincreased.Anextensionin2008tooktheshareof

hospitalrevenuesobtainedfromproductswithnegotiated

pricesto20%.Thefractionwasfurtherincreasedto34%in

2009and70%in2012.

Afterpermittingpricecompetition,theprice

elastic-ityoftheinsurers’ demandisgreater(inmagnitude)in

lessconcentrated,morecompetitivemarkets,andprices

couldbepusheddownfurtherinthesemarkets.

Accord-ingtotheDorfman-Steinercondition,qualitywouldthen

suffer in more competitive markets unless there was

a sufﬁcient countervailing increase in the quality

elas-ticity. This increase would occur only if quality was

sufﬁcientlyobservablesuchthatinsurerscouldmonitorit

andthenewcontractingarrangementsgavethemgreater

motivation and scope to pressure hospitals for quality

improvements.10

7 _The_four_largest_companies_account_for₉₀_percent_of_the_market.

Mar-ketconcentrationbyregionisoftenevenhigher,whichisduetothe factthatthesecompaniestypicallyevolvedfromformerregionalsickness funds(Halbersmaetal.,2010).

8 _The_DTC_system_is_more_{comprehensive}_than_DRGs._It_includes

out-patientconsultationsandtheremunerationofmedicalspecialists.There wereabout29,000DTCsintheperiodweexamine.

9 _During_the_period_covered_by_our_analysis,_almost_all_contractual

agreementsthatincludedqualityimprovementinitiativeswereframedin termsofstructureandprocessindicatorsratherthanoutcomeindicators (SchutandVandeVen,2011).

10 _Note_that,_at_the_time_of_the_contracting_reform,_medical

special-istswerepaidfee-for-serviceatregulatedproduct-specificremuneration ratesdeterminedbythepredictedtimerequiredforeachprocedureand afixedpaymentperhour.Whilespecialists,likehospitals,hadafinancial interestinattractingmorepatients,theircompensationwas,therefore,

Becauseofthehighoverallnumberofproducts(DTCs),

insurersandhospitalsoftennegotiateoverclustersof

prod-ucts.Thiswasnotthecaseforhigh-volumeproductslike

non-emergencyhipreplacementsduringtheperiod

cov-ered by this study.11 _At _that _time, _contracts, _including

those agreedafternegotiationoverprices,werewritten

foraperiodofoneyear.Thegoalofthecontractingreform

wastomakeinsurers,actingaspurchasingagentsfortheir

customers,moreresponsivetoprice,volumeandquality.

Insurerswereallowedtocontracthospitalsselectively,

giv-ingthemleveragetonegotiatelowerpricesand,possibly,

alsotoobtainbetterqualitytotheextentthatthiscouldbe

speciﬁedbythelimitedqualityindicatorsavailableatthe

time.

Inacompetitiveinsurancemarket,lowerpriceswould

feedthroughtolowerpremiums(Ho,2009).Inthisrespect,

an important complement tothe 2005 insurer-hospital

contractingreformwasa2006reformofthehealth

insur-ancemarketintendedtoincreasepricecompetitionamong

insurersbymandatingcitizenstopurchaseabasichealth

insurancepackagefromprivateinsurers(SchutandVande

Ven,2011).Thelogicofthesetwinreformsisthat–asin

thetwo-stagemodelofhospitalcompetition(Cappsetal.,

2003;TownandVistnes,2001;Gowrisankaranetal.,2015)

–insurerswouldcompeteforcustomersonpremiums,as

wellasthescopeandqualityoftheirprovidernetworks,

while hospitalswould competeonpriceand qualityfor

inclusion inthosenetworks.Infact,prior to2010–the

last yearcovered by ouranalysis – there was very

lit-tleimplementationofselectivecontracting.Bythatyear,

onlyoneinsurerhadenteredintoselectivecontractsand

thesedidnotcoverhipreplacements(SchutandVande

Ven,2011).Since2010,thenumberofinsurerscontracting

withrestrictedprovidernetworkshasincreased.12_But

dur-ingthepost-reformperiodwestudy(2006–2010),insurers

reliedonthethreatofselectivecontracting,ratherthanits

implementation,togivethembargainingpowerin

negoti-ationswithhospitals.

Someinsurerstriedtosteertheircustomerstohospitals

identiﬁedontheirwebsites as‘preferredproviders’that

wereclaimedtooffergoodqualitycare,althoughchoice

wasnotrestrictedtothesehospitals.Oneinducementwas

towaivethedeductibleiftheinsuredsoughttreatment

at apreferredprovider. Theavailableevidencesuggests

thatthesesoftchannelingpolicieshadlittleinﬂuenceon

patientchoiceduringtheperiodwestudy(VanderGeest

andVarkevisser,2016,2019),andwearenotawareofany

attempttousethemtospeciﬁcallytargethipreplacement

notdirectlyaffectedbytheoutcomeofanypricenegotiation.The qual-ityoftreatmentdeliveredbythespecialistscouldbeaffectedindirectly throughthevolumeofprocedures–negotiatedsimultaneoustoprice– theywerecalledupontoperform.Quality–speciﬁcally,thereadmission ratesweexamine–couldalsohavebeenaffectedbypricenegotiation throughconsequentpressuresonnon-specialistmedicalstaff,attention paidtoaftercareandhospitalpurchasingofnon-manpowerinputs.

11_This_has_been_conﬁrmed_by_the_authors_through_interviews_with

rep-resentativesofinsurersandhospitalswhowereinvolvedincontract negotiationsduringtheperiodcoveredbythisstudy.

12_This_is_often_done_by_stipulating_minimum_volume_standards,_but_only

foralimitedsetoftreatments,suchascomplexcancersurgery,thatdoes notincludehipreplacements.

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patients.Additionally,asurveyofpatientswhohad

non-emergencyhospitalcareintheperiod2008-10revealed

thatonly7percenthadsearchedforqualityinformation

(VanderGeestandVarkevisser,2012).Hence,thereform

leftpatients’choiceofhospital(forhipreplacementsand

otherprocedures)effectivelyunfetteredduringtheperiod

studied.

The complexityof healthcare andits stochastic

rela-tionshipwithhealthoutcomesmakesmeasurementofits

qualityinherentlydifﬁcult.In2008,theDutchHealthCare

Inspectoratelaunchedaninitiativewiththeambitionof

developingacomprehensivesetofqualityindicatorsfor10

procedures,includinghipreplacement.Butthiswas

con-ﬁnedtoaminorityof33hospitalsandplanstoextendit

werenotimplementedbecauseoflackofcooperationfrom

hospitalsandfailuretoagreeonastandardizedsetof

qual-ityindicators(SchutandVandeVen,2011).Afterthisfailed

attemptatselfregulation,onlyin2013didthegovernment

establishaQualityInstitutetodisseminateuniform

qual-ityindicatorsanddeﬁnelegallyenforcedstandards.Hence,

uptotheendofourperiodofanalysisin2010,no

mean-ingful, comparable information aboutthequality ofhip

replacements,suchashospital-speciﬁcreadmissionrates,

wasavailable.

Thelackofinformationwouldbeexpectedtoresultin

hospitalsexposedtogreatercompetitivepressureshifting

effortfrom maintainingpoorlyobserved quality to

cut-tingcostsinordertobecomemorepricecompetitiveonce

priceswerederegulated(Propperetal.,2008).Ontheother

hand,thenewcontractsinvolvedhospitalsandinsurers

negotiatingfortheﬁrsttimeoverthedeliveryofspeciﬁc

proceduresakintoDRGs.Hospitalsexposedtomore

com-petitionmighthaveexpendedgreatereffortonensuring

thattheywerenotpenalizedforpoorperformanceonthe

availableproxiesforqualitytakenintoaccountinfuture

contract negotiations.Ifthis motivationwassufﬁciently

strong,thenexposuretogreatercompetitivepressureafter

thecontractingreformcouldevenhaveraisedquality.

Existingevidenceonthemarketresponsetothe2005

contracting reform is limited. Qualitative analyses

con-cludethatpriceratherthanqualityhasbeentheprimary

focusofcontractnegotiations(Meijeretal.,2010;Ruwaard

etal.,2014;SchutandVandeVen,2011).Thisis

unsurpris-inggiventhedearthofinformationavailableonquality.The

DutchHealthcareAuthorityreportsthatpricesofproducts

(DTCs)thatwereinthefree-pricingsegmentfrom2005

declinedinrealtermsandrelativetotheregulatedpricesof

otherproductsupto2008(NZa,2009).Between2006and

2009,nominalpricesincreasedby2.7%,onaverage,inthe

regulatedsegmentofproductscomparedwithanincrease

ofonly1.2%inthefree-pricingsegment(SchutandVande

Ven,2011).Thereisnoevidencethathospitalsoffsetlower

priceincreasesbyincreasingservicevolumeinthe

free-pricingsegment(Krabbe-Alkemadeetal.,2017;Schutand

VandeVen,2011).Krabbe-Alkemadeetal.(2017)found

thatpermittingpricecompetitionledtolowertotal

hospi-talcosts.

Theeffectofthepricederegulationbroughtaboutbythe

2005reformonhospitalqualityhasnotpreviouslybeen

estimated.Afewstudieslookattherelationshipbetween

priceand qualityvariation orbetweenhospital

concen-trationand qualityafterprices wereliberalized.Heijink

etal.(2013)ﬁndonlylimitedvariationinhospitalquality

andnorelationshipbetweencontractpricesandqualityfor

cataracttreatment.Croesetal.(2017)ﬁndanegative

rela-tionshipbetweenhospitalmarketshareandqualityscores

fortwoofthethreediagnosticgroupsstudied.Bijlsmaetal.

(2013)ﬁndthathospitalconcentrationisassociatedwith

variousprocessindicatorsofquality,butbothpositiveand

negativerelationshipsarefoundandthereisno

relation-shipbetweenhospitalconcentrationandanyofanumber

of outcome indicators examined.None of these studies

haveadesigncapableofidentifyingthecausaleffecton

qualityofpricederegulation.

4. Dataandmeasures

4.1. Sources

We usecomprehensive, hospital-level datafrom the

NationalMedicalRegistryonpatientdischargesfromall

Dutchhospitalsfor the years 2001–2010.For each

dis-charge, we observe the patient’s gender, age,zip code,

primary/secondary/tertiarydiagnoses(ICD-9CM),

admis-sion period, the admission hospital code (but not its

name)andprocedurescarriedout.Proceduresare

classi-ﬁedaccordingtoamethodthatisbasedon,andforthe

proceduresexaminedequivalentto,theInternational

Clas-siﬁcationofProceduresinMedicine(WHO-FIC,2017).For

mostoftheanalyses,werestrictattentiontopatients

dis-chargedafteranon-acutehipreplacement(seebelowfor

detailsoftheselectioncriteria).13_As_a_robustness_test,_we

examinepatientsdischargedafternon-acuteknee

replace-ment.Weconstructahospital-levelpanelwhichincludes

informationonqualityofcareandpatientcasemix,and

supplementthiswithanindexofsocioeconomicstatusthat

isaveragedoverallthenon-acutehipreplacementpatients

ofahospitalinagivenyear.Thisindexisconstructedby

theNetherlandsInstituteforSocialResearchfromthe

edu-cation,incomeandlabormarketstatusofresidentsofazip

codearea(SCP,2017).

4.2. Qualitymeasures

We use theunplanned 90-day readmission rate

fol-lowing non-acute hipreplacement as our main quality

indicator. Thisis preferred totheposthip replacement

mortality rate because the latter was very low in the

periodstudied.14 _We_restrict _attention_to_all_unplanned

readmissions,includingemergencyreadmissions,because

plannedreadmissions(e.g.forascheduledprocedure)are

notgenerallyasignalofqualityofcare.Higherunplanned

readmissionrateshavebeenshowntoberelatedto

sub-optimalqualityoftreatmentgenerally(e.g.Mokhtaretal.,

13 _Also_sometimes_referred_to_as_planned_hip_replacements_or_elective

hipreplacements.Hence,thesedonotincludehipfracturesoracutehip replacements.

14 _Using_the_Causes_of_Death_Register_provided_by_Dutch_Hospital_Data

andStatisticsNetherlands,wecalculateawithinhospitalmortalityrate of0.25percentanda30-daymortalityrateof0.30percentfollowing non-acutehipreplacementintheperiod2001–2010.

(6)

2012;Rosenetal.,2013)andspeciﬁcallyforhip

replace-ments(e.g.Clementetal.,2013;Avrametal.,2014;Saucedo

etal.,2014;Kurtzetal.,2016).Allunplannedreadmissions

areattributedtotheoriginaltreatmenthospitalusingthe

anonymizedhospitalcodes.

Unplannedreadmissionsfollowing jointreplacement

aredetermined,inpart,bythequalityandsafetyofthe

initialhospitalstay,transitionalcareservicesandpost

dis-charge support(Friebel et al., 2017). Widespread belief

thatreadmissionsareindicativeofpoorqualitytreatment

isreﬂectedinthefactthatﬁnancialpenaltiesforexcess

readmissions(includingforhipreplacements)havebeen

imposedonhospitalsinboththeUSandtheUKsince2012

(JoyntandJha,2012).Consistentwiththis,inourdata,four

ofthetopﬁvereasons(identiﬁedfromdiagnosticcodes)for

hipreplacementpatientstobereadmittedwithin90-days

arerelated tocomplications, infections orinﬂammatory

reactionsduetoprostheticimplants.15_There_is_no

consen-susonwhethera90-dayor30-dayfollow-upwindowto

deﬁneorthopedicreadmissionsprovidesthebetter

indica-torofquality(Ramkumaretal.,2015).Sincethetwoare

highlycorrelatedforhipreplacementsinourdata(r=0.85,

p<0.01atthestartofourstudyperiodin2001),itshould

make little differencewhich is used. Complicationsare

alsothemainreasontobereadmittedwithin30-days.We

examinerobustnesstousing30-dayreadmissions.

Infor-mationonhipreplacementreadmissionrateswasnotin

thepublicdomainoravailabletohealthinsurersduring

theperiodofanalysis,andsothisindicatorisunlikelyto

havebeensubjecttomanipulationbyhospitals.

4.3. Sampleselection

Wehave abalanced panelof 103hospitalsobserved

from2001to2010,yielding1,030hospital-year

observa-tions.Patientlevelsampleinclusionandexclusioncriteria

arebasedonthosedeﬁnedinthetechnicalspeciﬁcations

of the US Agency for Healthcare Research and Quality

(AHRQ)InpatientQualityIndicator#14(AHRQQIVersion

5.0;IQI#14),whichmeasuresthehipreplacement

mor-tality rate.The total populationincludes all discharged

patients aged 18 or older in any year between 2001

and 2010 with any procedure code that indicates

par-tialor fullhip replacementand anyprincipal diagnosis

codethatindicatesosteoarthrosisofthepelvicregionor

thigh,andforwhichallnecessaryinformationwaspresent

(n=153,208).16_For_our_analysis,_we_drop_those_with_any

listeddiagnosiscodes indicating hipfracture and those

withcodesindicatingpregnancy,childbirthorpuerperium

(n=793).Wealsoexcludethosewhotransfertoanother

hospital(n=264) because it is impossibleto determine

whetherreadmissioninsuchcasesindicatessub-optimal

qualityofthetreatmentreceivedintheﬁrstorthe

sec-15 _{Consequently,}_it_is_unlikely_that_restricting_attention_to_unplanned

readmissionsjudged(bysomecriteria)toberelatedtotheindexhip replacementadmissionwouldhavemuchaffectonourestimates.

16 _See_Appendix₁_for_the_relevant_procedure_codes_and_ICD-9CM

diag-nosiscodes.

ondhospital.17_Patients_who_died_in_the_hospital_(n₌₈₅₎

are also dropped.18 _After _imposing _all _these _exclusion

restrictions,weareleftwith152,066(99.3%of)discharges

followingnon-acutehipreplacementduringourperiodof

analysis.Ofthese,8.0percentwerereadmittedtoahospital

within90daysforanyreasonthatwasnotplanned.19

4.4. Measuresofhospitalmarketstructure

Wemeasureconcentrationatthehospitallevelusing

theHerﬁndahl-HirschmanIndex(HHI)basedonthe

num-berofhospitalbeds:HHIh=

Nh

i=1

m2

i,wheremiisthepercent

marketshareofhospitalithatlieswithinaﬁxedradius

of hospitalhand Nh isthetotal numberof hospitalsin

thatmarket.Somehospitalshavemultiplelocationsthat

donotallliewithinthesamemarketdeﬁnedbydistance.20

Appendix2 explainshow wecalculatetheHHIinthese

cases.For ourbaselineanalysis,weusea30 kilometers

(by road)ﬁxedradiusbecause patientstravel, on

aver-age,for20minutestogettothehospitaloftheirchoice

(Varkevisseretal.,2010;Varkevisseretal.,2012;Beukers

etal.,2014)andallDutchhospitalsdohipreplacements

(Roosetal.,2019).Butsincevariationaroundthemean

traveltime ishigh(Varkevisseret al.,2010; Varkevisser

etal.,2012;Beukersetal.,2014),weexaminesensitivityto

ﬁxingtheradiusat20,40and50kilometerstodeﬁnethe

market.

To protect privacy, hospitals are anonymized in the

patient-level data and we are not allowed to attach a

continuousmeasureofHHItoapatientrecordsincethis

couldrevealthehospitalused.TheHHI ofeachhospital

was thereforeconstructed in a databasenot containing

patient-leveldata.Next,anindicatorofwhethertheHHI

of each hospital is under2500was derived –to

deter-mine location in a less concentrated market – and this

was then linked to the patient-level dataset using the

hospital identiﬁer code byStatistics Netherlands.There

is no objective HHI threshold for deﬁning a

competi-tivemarket.Ourchoiceof2500,whichcorrespondstoa

marketcomprising fourequallysizedhospitals,isbased

on theUS FederalTrade Commission(2010) horizontal

mergerguidelines.21_Given_the_greater_competitive

pres-17_While_transfer_to_another_hospital_could_itself_be_an_indicator_of_low

quality,theextremelysmallnumberoftransfersrulesoutanalysisofsuch anindicator.Italsomeansthatdroppingthesecaseswillhaveanegligible impactonourestimates.

18_Given_the_very_low_within_hospital_mortality_rate_following_non-acute

hipreplacement,anyselectionbiasarisingfromexcludingthosewhodie islikelytohaveanegligibleimpactontheestimates(Laudicellaetal., 2013;Fischeretal.,2014).

19_As_shown_by_Figure_A2_in_the_Appendix,_total_volumes_aggregated

overthetwogroupsdroppedin2006andthenslightlyincreasedagain. Thedifferenceinvolumesbetweenthetreatmentandcomparisongroups isrelativelystableovertime.

20_Of_the₁₀₃_hospitals,₄_had_more_than_one_location_within_the_period

thatwestudy.

21_The_European_Commission₍₂₀₀₄₎_guidelines_on_the_assessement_of

horizontalmergersdonotincludeanHHI-basedmarketclassiﬁcation. Theymentionaslightlylowerthreshold(HHI>2000)asaninitialindicator ofalackofcompetition.

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sureonhospitalsoperatinginlessconcentratedmarkets

approximatedbyHHI<2500,itishypothesizedthatthey

wouldbeaffectedmorebythe2005reformthatpermitted

competitionthroughfreenegotiationofpricesthanwere

hospitalsoperatinginmoreconcentratedmarkets(i.e.with

HHI≥2500).22_Over_the_period_2001–2010,_there_is_a_nearly

evensplitbetweenhospitalswithHHI≥2500(n=52)and

hospitalswithHHI<2500(n=51).

5. Empiricalstrategy

Identiﬁcationofthequalityeffectofpermitting

compe-titionthroughfreenegotiationofpriceisdifﬁcultgiventhat

allhospitalsareexposedtopricederegulationafter2005.

Intherelatedliterature,identiﬁcationfroman

across-the-boardpolicychangeistypicallydonethroughcomparison

ofthebefore-and-afterchangeintheoutcomeinless

con-centrated markets with the respective change in more

concentrated markets(e.g. Propperet al., 2008; Cooper

etal.,2011;Gaynoretal.,2013).Whilethis

difference-in-differences(DID)strategydoesnotidentifytheeffectofthe

policyperse,itmaybethoughtcapableofidentifyingthe

differentialeffectofthegreatercompetitiongeneratedby

thepolicyinlessconcentratedmarketscomparedwiththe

weakercompetitioninducedinmoreconcentrated

mar-kets,providedtheoutcomesofhospitalsoperatinginmore

and in less concentrated markets would have followed

commontrendsifthepolicyhadnotbeenimplemented.

Fricke(2017)pointsoutthatthestatedcommontrends

assumptionisinsufﬁcienttoidentifythedifferentialeffect

oftreatmentintensities.Iftheassumptiondoeshold,then

the differential effect is identiﬁed only under the

fur-therassumptionofhomogeneityintheeffectofmarginal

changes in treatmentacross, in this context, more and

lessconcentratedmarkets.Thishomogeneityassumption

islikelytobeimplausiblegiventhathospitalsarenot

ran-domlyassignedtomarkets.ApplyingFricke’slogictothe

situationstudiedhere,whatcanplausiblybeidentiﬁedis

alowerbound(inmagnitude)ontheeffectofprice

dereg-ulationinlessconcentratedmarketscomparedwiththe

continuationofpriceregulationinthosemarkets.23_Two

assumptionsarenecessarytoobtainthispartial

identiﬁ-cation.First,there mustbecommontrendsacrossmore

andlessconcentratedmarketsunderthecounterfactualof

nopolicychange.Second,thepolicyeffect(relativetono

change) inlessconcentrated marketsmustbethesame

signbutofgreatermagnitudethantheeffectinmore

con-centratedmarkets.24_Intuitively,_if_price_deregulation_has

anyeffectinmoreconcentratedmarkets,thentakingthe

22_As_a_check_for_further_{heterogeneity}_in_hospitals’_responses_to_price

deregulation,aﬁnercategorizationofhospitalsbyHHIisalsoused.

23_Fricke₍₂₀₁₇₎_considers_{identiﬁcation}_of_the_effects_of_two_(or_more)

distincttreatmentsusingaDIDstrategy.Thetreatmentscanbe distin-guishedbydegreeofintensity.Toapplythesetuptothisstudy,onemust thinkofthetreatmentsnotaspricederegulation,butratherasthe inten-sityofcompetitionarisingfromthispolicy.Weareinterestedinthe qualityeffectofmoreintensecompetitionandidentifythisby (effec-tively)interactingasinglepolicychange(pricederegulation)withmarket concentrationtoobtainvariationincompetition(treatment)intensity.

24_That_is,_monotonicity_in_treatment_intensity,_where_treatment_is_the

competitivepressureinducedbythepricederegulation.

DIDbetweenmoreandlessconcentratedmarketscannot

pointidentifytheeffectinthelatter.Butitwillgivealower

boundontheeffectinthelessconcentratedmarkets

pro-videdthattheeffectisgreaterinmagnitudebuthasthe

samesignastheeffectinmoreconcentratedmarkets(and

commontrendshold).

Hospitals with an HHI below 2500 form our

treat-ment group, while those with an HHI of at least 2500

belongtothecomparisongroup.Onlyhospitalswithan

HHIeitheralwaysbelow2500oralwaysabove2500during

the2001–2010periodareusedintheanalysis.Hence,no

hospitalcanswitchfromthetreatmentgrouptothe

com-parisongrouporviceversa,andthecompositionofeach

groupisheldconstantbyconstruction.Twenty-one

hospi-talsoutofatotalof103areexcludedbecausetheyfailto

meetthiscriterion.Thisismainlybecauseofmerger

activ-itybetween2001and2010.Oftheremaining82hospitals,

43haveHHI<2500andareinthetreatmentgroup.

Inourmainanalysis,weusedatafrom2001to2004to

capturetheperiodbeforepricederegulationanddatafrom

2006to2010forthepost-reformperiod.Weexcludedata

from2005,asthepolicywasimplementedonFebruary1

ofthatyear.

Weestimatethefollowingﬁxedeffectsmodelbyleast

squares:

RRht=˛+ı1 (HHIh<2500)×POSTt+Xht

+uh+t+εht (1)

whereRRhtistheunplanned90-dayreadmissionrate

(per-cent)fornon-acutehipreplacementsathospitalhinyear

t,1()istheindicatorfunction,POSTt isabinaryindicator

equalto1forthepost-reformperiod(2006-2010),Xhtisa

vectorofhospitalcharacteristicsthatvaryovertimebutare

plausiblynotaffectedbypricederegulation,uhisahospital

ﬁxedeffect,␭tisayeareffectandεhtisarandomerrorterm.

ThecovariatesconsistoftheCharlsonindexofcomorbidity

(Quanetal.,2011;Quanetal.,2005)averagedovera

hos-pital’snon-acutehipreplacementpatientsinayear,the

percentageofthesepatientsaged65+,40–60and18–39

years,thepercentagefemale,thepercentagedischargedto

askillednursingfacility,25_and_the_mean_zip_{code-speciﬁc}

socioeconomicscoreofthepatients. Theseindicatorsof

casemixareincludedtoincreaseefﬁciencyandtoallowfor

anychangeinthecompositionofhipreplacementpatients

thatdiffersbetweenhospitalsin lessand more

concen-tratedmarketswithoutbeingcaused bythedifferential

effectofpricederegulation.Wehavearguedthatthereis

littleornoreasontoexpectthereformtohavecausedhip

replacementpatientstoselectdifferenthospitalsor

hos-pitalstohaveselecteddifferentpatients,andwereturnto

thispointattheendofthissection.

Table1 presentsmeansofthe covariatesbeforeand

afterthereformforthetreatmentandcomparisongroups.

Priortothereform,therearesomesigniﬁcantdifferences

inthecharacteristicsofthepatientsacrossthetwogroups.

25 _We_assigned_patients_reported_to_be_discharged_to_‘other_healthcare

organization’toanursinghomedischargesincearecent(unpublished) StatisticsNetherlandsstudyreportsthataround70%ofthesepatientsare transferredtoanursinghomefacility.

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Table1

Meansofcovariatesbyperiodandtreatmentgroup.

Patients’characteristics Pre-reform Post-Reform Change(Post-Pre)

Proportiondischargedto skillednursingfacility

ComparisonGroup 0.048 0.059 0.011 {0.061} {0.084} (0.009) TreatmentGroup 0.075 0.087 0.012 {0.096} {0.133} (0.013) Difference(T-C) 0.03*** 0.001 (0.009) (0.016) Proportionfemale ComparisonGroup 0.69 0.68 −0.01* {0.05} {0.06} (0.01) TreatmentGroup 0.72 0.69 −0.03*** {0.06} {0.07} (0.01) Difference(T-C) 0.03*** −0.02* (0.01) (0.01) Meanage ComparisonGroup 69.85 70.36 0.51* {19.23} {22.53} (0.24) TreatmentGroup 70.60 70.50 −0.11 {25.09} {33.50} (0.34) Difference(T-C) 0.75*** −0.61 (0.25) (0.42)

MeanCharlsonScore (comorbidity) ComparisonGroup 0.0018 0.0009 −0.0009* {0.01} {0.00} (0.0005) TreatmentGroup 0.0039 0.0017 −0.0022 {0.02} {0.00} (0.0016) Difference(T-C) 0.0021 −0.0014 (0.0016) (0.0016)

Meansocioeconomicscore

ComparisonGroup 6.81_{0.53} 6.88_{0.55} 0.06 (0.06) TreatmentGroup 7.46 7.49 0.03 {0.48} {0.48} (0.06) Difference(T-C) 0.65*** −0.04 (0.06) (0.08)

Numberofhospitals ComparisonGroup 39 39 39

TreatmentGroup 43 43 43

Numberofpatients ComparisonGroup 28613 33096 61709

Notes:Pre-/post-reformcellentriesareobtainedbyfirstcomputingthemeanacrossallnon-acutehipreplacementpatientsdischargedfromeachhospital andthentakingthesimpleaverageofthesemeansacrossallhospitalswithinagroupandperiod.Figuresincurlybracketsarestandarddeviationsacross hospitals.Figuresinparenthesesarestandarderrorsoftheestimatedchangeinthemean.Hospitalsandpatientsareselectedusingthecriteriadescribed intheData,sampleselectionsection.Thesocioeconomicscoreisincreasinginsocioeconomicstatusandrangesfrom0to10.TheCharlsonscore(Quan etal.,2011)rangesfrom0to9,withhigherbeingmoresevere.***Significantatthe1percentlevel.**Significantatthe5percentlevel.

Butthedifferencesarerathersmall.Signiﬁcancereﬂects

thelargesamplesize.Thetreatmentgrouphasaslightly

higherproportionoffemales,itspatientsareabout1year

older and they have a higher socioeconomic status as

wellasagreater propensitytobeadmittedtoa skilled

nursingfacilityafterdischarge,onaverage.Thereareno

pre-reformdifferences in comorbidity measuredby the

Charlsonindex.Thecharacteristicsofthepatientschange

relativelylittlebetweenthetwoperiodsforbothgroups.

Noneofthedifference-in-differencesofthese

character-isticsaresigniﬁcantlydifferentfromzero,indicatingthat

therewasnodifferentialchangeinthecompositionofthe

groupswithrespecttotheseobservables.

Conditionalonthecovariates(Xht),ifintheabsenceof

pricederegulationin2005theaveragereadmissionrateof

hospitalsinlessconcentratedmarketswouldhavechanged

in2006-10 by asmuch as thechangethat would have

occurredinhospitalsoperatinginmoreconcentrated

mar-ketsandifpermittingpricecompetitionhadalargereffect

inlessconcentratedmarkets,thentheparameterıin(1)is

alowerbound(inmagnitude)ontheaverageeffectofthe

pricederegulationinamorecompetitivemarket

environ-mentonthereadmissionrateamongthehospitalsinthe

lessconcentratedmarkets.

Fig.1supportstheplausibilityofthecommontrends

assumption. Between 2001 and 2005, the trend in the

readmissionrate,andindeeditslevel,isverysimilarfor

hospitalsoperatinginmoreandlessconcentratedmarkets.

Estimationofamodelsimilarto(1)usingdatafrom2001to

2004onlyandallowingtheyeareffectstodifferbetween

hospitalslocatedinmore(HHI_≥2500) andless

concen-tratedmarketsrevealsnoevidenceofdifferentialtrendsin

theperiodimmediatelyprecedingthereform(Appendix3,

TableA1column(i)).

Agapopensupinthereadmissionratesin2006

imme-diatelyafterthecontractingreform.Thereadmissionrate

fallsinthelessconcentratedmarkets,whileitcontinuesto

riseinthemoreconcentratedmarkets.Takenatfacevalue,

this wouldsuggestthathospitalsthatexperiencedprice

deregulationinamorecompetitiveenvironmentraisedthe

qualityofthecaretheydelivered.However,thedivergence

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sim-Fig.1.90-dayreadmissionrateafternon-acutehipreplacement.

Notes:HospitalsandpatientsselectedbycriteriadescribedintheData,sampleselectionsection.HHI(Herﬁndahl-HirschmanIndex)calculatedwitha radiusof30kmdeﬁningtheboundaryofamarket.

ilarinmoreandinlessconcentratedmarkets.Overthefull

ﬁve-yearpost-reformperiod,theﬁguresuggeststhatprice

deregulationinamorecompetitiveenvironmentdidnot

consistentlylowerorraisethequalityofhipreplacements.

MotivatedbyFig.1,andbecausehospitalsandinsurers

maynothavefullyadjustedtothenewcontracting

condi-tionsimmediatelyafterpricesbecamefreelynegotiable,

we estimatea secondmodel that allows thetreatment

effecttovaryinthepost-reformperiod:

RRht=˛+

k=06,10

ık1(HHIh<2500)×YEARkt

+Xht+uh+t+εht (2)

whereYEAR06t=1(YEARkt=1)iftheyearis2006(20k).

Underthesameassumptionsaboutcommontrendsand

differentialeffectsinmoreandlessconcentratedmarkets,

␦06givesalowerboundontheaverageeffectofprice

dereg-ulationinamorecompetitivemarketenvironmentin2006,

etc.

Market concentration is generally considered to be

potentially endogenous because performance may feed

backintostructureandunobservableattributesmay

inﬂu-enceboth quality and patientchoice ofhospital (Evans

etal.,1993).Theempiricalstrategyadoptedandthe

insti-tutionalcontextinwhichthisstudyisconductedminimize

the threats to identiﬁcation from these two potential

sourcesofendogeneity.Hospitalﬁxedeffectsdealwithany

timeinvariantcorrelatedunobservables.Weavoidusing

timevaryinginformationonmarketconcentrationby

cat-egorizingeachhospitalintooneoftwogroupsaccording

towhetheritsHHIisalwaysbelow2500oralwaysabove

2500.Hospitalsthatcrossthisthresholdovertheperiod

ofanalysisaredropped.26_The_HHI_are_calculated_from_bed

numbers,ratherthanpatientﬂows,andsoendogeneityof

26_As_noted_earlier,_horizontal_mergers_among_hospitals _are_mainly

responsibleforthresholdcrossings.

thismeasureofmarketstructuretoperformanceisnota

majorconcern.

Wedeliberatelychooseanelectiveprocedureto

mea-surequalityinorder toobtainevidenceontheeffectof

competitiononatreatmentthatislikelytoexhibitmuch

greaterdemandelasticitywithrespecttopriceand

qual-itythanisthecasewithacutetreatments (e.g.forAMI)

thathavebeenthefocusofpreviousreseach(e.g.Cooper

etal., 2011; Gaynoretal., 2013).Ifgreater competition

doespotentiallyreducequalitybecausedemandismore

responsivetopricethantoquality,thenwewouldexpect

toobservethisforanelectiveprocedure.Therearethree

reasonswhythis studyisnot particularlyvulnerableto

selectionbiasarisingfrompatientchoicedespiteitsfocus

onan electiveprocedure. First,we eliminate correlated

timeinvariantunobservabledifferencesinpatient

compo-sitionacrosshospitalswithﬁxedeffects.Onlyifthereform

weretochangeunobservablepatientcharacteristics

dif-ferentiallyacrossthetreatment andcomparison groups

wouldtherebeanypotentialbias.Thelackofany

substan-tialorsigniﬁcantdifference-in-differencesinobservable

covariates(Table1)suggeststhattheremaybelittlereason

toworryaboutpotentiallycorrelatedtimevarying

unob-servables.Second,aspreviouslymentioned,patientsand

insurerslackedinformationonhospitalquality,including

readmissionratesforhipreplacements,beforeandafter

thereform.Therewaslimitedscopeforselectionon

qual-ity.Third,incontrasttotheUKhealthcaremarketreforms

that have beenthesubject of many previousstudies,27

thereformweexaminedidnotchangeopportunitiesfor

27 _These_studies_either_use_rich_data_or_intruments_to_deal_with_time

vary-ingpatientselection.Skellern(2019)controlsforrisk-adjustedPatient ReportedOutcomeMeasures(PROMs),whileGaynoretal.(2013),Cooper etal.(2011)andMoscellietal.(2016)instrumenthospitalchoiceusing GP/patient-hospitaldistances.Cooperetal.(2011)donotreject exogene-ityofmarketstructureandMoscellietal.(2016)ﬁndthatinstrumenting hasverylittleimpactontheestimates,relativetocontrollingforarichset ofpatientcovariates.

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Table2

Unplanned90-dayand30-dayhipreplacementreadmissionratesbyperiodandtreatmentgroup.

Outcome Pre-reform Post-Reform Change(Post-Pre)

90-dayreadmissionrate

ComparisonGroup 0.0768 0.0827 0.0059* {0.0316} {0.0290} (0.0036) TreatmentGroup 0.0766 0.0813 0.0047 {0.0321} {0.0326} (0.0037) Difference(T-C) −0.0003 −0.0012 (0.0036) (0.0051)

30-dayreadmissionrate

ComparisonGroup 0.0419 0.0482 0.0062** {0.0227} {0.0200} (0.0025) TreatmentGroup 0.0439 0.0493 0.0054* {0.0237} {0.0239} (0.0027) Difference(T-C) 0.0019 −0.0008 (0.0026) (0.0037)

Numberofhospitals ComparisonGroup 39 39 39

Numberofpatients ComparisonGroup 28613 33096 61709

Notes:Tablegivesthesimplemeanreadmissionrateaveragedoverallhospitalsinthetreatment(HHI<2500)groupandthecomparison(HHI≥>2500) group.Figuresincurlybracketsarestandarddeviationsacrosshospitals.Robuststandarderrorsinparentheses.Hospitalsandpatientsselectedbycriteria describedintheData,sampleselectionsection.*Signiﬁcantatthe10percentlevel.

patientchoice.Asexplainedabove,patientshaddefacto

freechoiceofproviderbeforeandafterthereform.

Hospital-initiatedselectionofpatientsispotentiallyof

greaterconcern.Afterpriceswerederegulated,hospitals

operatinginmorecompetitivemarketscouldpossiblyhave

hadtheincentivetodrivedowncosts;e.g.bycherrypicking

morestraightforwardcasessothattighterbudgetswould

notimpingeonquality.However,becauseweidentifyfrom

comparisonacrosshospitalscategorizedbybroadranges

ofHHI,anycherrypickingwouldonlybiasourestimates

inthehighlyunlikelysituationthatpatientswereshunted

longdistances.Morelikelyisthatahospitalwouldrefer

apatientwhoisatgreaterriskofreadmissiontoa

neigh-boringhospital,whichwillmostprobablybeinthesame

treatmentorcomparisongroup.So,whilethecasemixof

individualhospitalsmaychangeduetopatientselectionin

responsetothereform,itisratherunlikelythatthiswould

changethecompositionofthegroups,andthecomparisons

inTable1againsupportthis.

6. Results

6.1. Mainestimates

Prior to the reform, there was no difference in the

90-dayreadmissionratebetweenthetreatment(low

mar-ketconcentration,HHI<2500)groupandthecomparison

(highmarket concentration) group(Table2, toppanel).

Thegroupsarebalancedontheoutcomeatbaseline.Post

reform,thereadmissionrateincreased(10%signiﬁcance)

by0.59 percentage points (pp) or7.8% in the

compari-songroupandbyonlyslightlyless(andnotsigniﬁcantly)

inthetreatmentgroup.Consequently, thesimple

(non-parametric)DIDestimateisnegative,whichwouldindicate

thatpricederegulationinacompetitivemarket

environ-mentledtolowerreadmissionrates(i.e.higherquality).

Buttheestimateisverysmallinmagnitude–1.6%ofthe

treatmentgrouppre-reformrate–andnotatallcloseto

beingsigniﬁcantlydifferentfromzero.

TheconditionalDIDestimateobtainedfrommodel(1)

andgivenintheﬁrstcolumnofthetoppanelofTable3is

positive,butitisevensmallerinmagnitudethanthesimple

DIDestimate,anditalsolacksanysigniﬁcance.Thefactthat

conditioningonobservablesdoesnotmarkedlychangethe

estimatefurtherindicatesthatthereislikelytobelittlebias

fromcorrelatedtimevaryingunobservables.The

insignif-icant conditionalDIDpoint estimateis only0.7% ofthe

readmissionrateinthetreatmentgrouphospitalspriorto

thereform.Wecanruleoutaneffectgreaterthan11%ofthe

pre-reformreadmissionratewith95%conﬁdence.Subject

totheusualcaveatthatfailuretorejectthenull

hypoth-esisdoesnotnecessarilyimplythatthereisnoeffect,the

magnitudeandprecisionoftheestimatedonotgivecause

tobelievethatpricederegulationinacompetitivemarket

ledtosubstantial,orevenany,deteriorationinthequality

oftreatment.Thisinferenceissubjecttothefurthercaveat

thatourempiricalstrategydeliversonlyalowerbound(in

magnitude)estimateoftheeffectofpricederegulationin

acompetivesetting.

ConsistentwithwhatisobservedinFig.1,the

condi-tionalDIDestimatesintheﬁrstcolumnofthebottompanel

ofTable3suggestthatpricederegulationinless

concen-tratedmarketsmayhavereducedthe90-dayreadmission

rate byat least1.5 percentage points (19%) in theﬁrst

year(2006)afterthereformbuthadnoeffectintheyears

thereafter(2007-2010).Asisapparentfromtheﬁgure,the

negativeeffectin2006,whichissigniﬁcantonlyatthe10%

level,isdrivenbyafallinthereadmissionrateofthe

hos-pitalsoperatingin lessconcentrated marketsanda rise

inthereadmissionrateofhospitalsinmoreconcentrated

markets.Itwouldbedifﬁculttoattributethesedivergent

movementstoapositive effectofpricederegulationon

quality.

For all post-reform years after2006, the point

esti-matesarepositive.Overlookingthefactsthatnoneofthe

estimatesareremotelysigniﬁcantandtheyaresmallin

magnitude,onemightventuretoexplainthispatternas

arising froman initialpost-reform shock (in 2006)

(11)

Table3

Estimatedeffectsofpricederegulationonreadmissionratesafterhip(knee)replacement.

Hipreplacement KneeReplacement

Speciﬁcation (1) (2) (3) (4) (5)

90-dayreadmission 90-dayreadmission 90-dayreadmission 30-dayreadmission 90-dayreadmission radius30 radius20 radius40 radius30 radius30 Model(1) ␦ 0.0005 0.0063 0.0016 0.0003 0.0007 (0.0048) (0.0055) (0.0057) (0.0037) (0.0153) R2 _0.49 _0.461 _0.458 _0.437 _0.375 Model(2) ␦6 −0.0147* 0.0007 −0.0056 −0.0059 −0.0315 (0.0076) (0.0097) (0.0093) (0.0054) (0.0199) ␦7 0.0077 0.0089 0.0062 0.0072 0.0080 (0.0086) (0.0099) (0.0098) (0.0064) (0.0249) ␦8 0.0039 0.0085 0.0012 0.0028 0.0260 (0.0085) (0.0101) (0.0097) (0.0066) (0.0215) ␦9 0.0003 0.0018 0.0026 −0.0011 −0.0147 (0.0068) (0.0074) (0.0077) (0.0058) (0.0195) ␦10 0.0081 0.0122 0.0038 −0.0015 0.0220 (0.0074) (0.0087) (0.0088) (0.0058) (0.020) R2 _0.4990 _0.4630 _0.4600 _0.4410 _0.3880 NTreatmentHospitals 43 13 29 43 34 NComparisonHospitals 39 32 15 39 32 Nhospitalsxyears 738 495 396 738 5974 Npatients 114408 80077 74888 114408 18231 Nreadmittedpatients 9064 6489 6043 5241 1183

Notes:ToppanelgivesOLSestimatesof␦fromregression(1).SecondpanelgivesOLSestimatesof␦6until␦10fromregression(2).Allestimatesobtained fromregressionscontaininghospitalandyearfixedeffectsandcovariatesidentifiedinTable1.FullestimatesinAppendix3;Tables2and3.Robuststandard errorsinparentheses.HospitalsandpatientsselectedbycriteriadescribedintheData,sampleselectionsection.RadiusXindicatesthattheestimatesare basedontreatment/comparisongroupsformedonthebasisofaHHIcalculatedwitharadiusofXkmdefiningtheboundaryofamarket.Thesamplesize fallsastheradiusisreducedbecausemorehospitalscrosstheHHIthresholdof2500usedtodefinethetreatment/comparisongroupsduringtheestimation period.**Significantatthe5percentlevel.*Significantatthe10percentlevel.

hospitalsthatareexposedtomorecompetitivemarkets

areoperatingwithunregulatedprices.Inconsistentwith

thishypothesis,thepointestimatesdonotmonotonically

increaseinmagnitudeastimesincethereformlengthens.

Still,thelargest(buthighlyinsigniﬁcant)pointestimate

isinthelastofthepost-reformyearsanditis10%ofthe

pre-reformreadmissionrateofthetreatmentgroup.This

placesaﬁnalcaveatontheconclusionthattherewasno

negativeimpactonquality.

6.2. Robustness

6.2.1. Marketdeﬁnition

ThemainestimatesaregeneratedonthebasisofHHIs

calculatedwitharadiusof30kmusedtodeﬁnethe

bound-aryofthemarketaroundahospital.Tocheckrobustness,

we recalculatetheHHI using a radiusof 20 and 40km

todeﬁneamarket,recategorizehospitalsintothe

treat-mentandcomparisonsgroupsonthebasisoftherevised

indexandthenre-estimatemodels(1)and(2)ineachcase.

Estimatesaregivenintheappropriatelylabelledcolumns

of Table3.Witha radiusof30km, hospitalsareevenly

splitbetweenthetreatmentandcomparisongroups.Asthe

radiusiswidened,morehospitalsgetputintothe

treat-ment groupbecausetheHHI decreasesastheareathat

deﬁnesthemarketincreases.

Irrespective of the radius used, thetreatment effect

averagedovertheﬁveyearsofthepost-reformperiodis

insigniﬁcant.Whentheradiusisincreased,thepoint

esti-mateoftheeffectin2006(frommodel(2))continuesto

benegativebutsigniﬁcanceislost.28_When_the_radius_is

reduced,thispointestimateturnspositiveandagainitloses

signiﬁcance.Themarginallysigniﬁcantnegativepoint

esti-mateobtainedfor2006usingthebaselineradiusof30km

isclearlynotrobust.Thereisnosigniﬁcanteffectafter2007

irrespectiveofthegeographic radiususedtodeﬁnethe

market.Overall,irrespectiveoftheradiususedtodeﬁne

a hospital market,there is noclearevidence that price

deregulationinamorecompetitivemarketenvironment

consistentlyimpactedonthereadmissionrate.

One might be concerned that exposure to different

degreesofmarketconcentrationisconfoundedby

differ-ences(inresponsetothereform)betweenurbanandrural

locations.Thisis unlikelytobea well-founded concern

in thecontext of the Netherlands, which is the second

mostdenselypopulatedcountryintheOECDandoneof

themost urbanized.29 _Highly_developed _and _integrated

transportnetworksfurtherlimitthescopeforanymarked

and consequential urban-rural division in the country.

Onlythreehospitalsinoursamplearenotwithina30km

radiusofacitywithatleast50,000inhabitants,andonly

28 _Extending_the_radius_further_to_50km_produces_the_same_general

pat-tern:nosigniﬁcanteffectaverageoverallpost-reformyearsandanegative butnotatallsigniﬁcantpointestimatefor2006.SeeAppendix3TableA2 andA3,column(iv).

29 _Dutch_population_density_is_almost_twice_that_of_the_UK_and_more

than14timesgreaterthanthatoftheUS(IndexMundi,2020).Morethan 75percentofthepopulationlivesinpredominantlyurbanregions(OECD, 2018).

(12)

oneofthesethreehospitalsremainsinoursampleafter

selectinghospitalsthatarepersistentlyinthesamegroup

deﬁnedbyHHIaboveorbelow2500.30_The_estimates_are

robusttoexcludingthis hospital(seeAppendix3, Table

A2andA3,column(v)).

6.2.2. Curtailedpost-reformperiod

In 2008, there were a number of policy changes in

the Dutch hospital industry. As mentioned above, the

HealthCareInspectoratemadeanunsuccessfulattemptto

developandimplementacomprehensivesetofuniform

quality indicators across hospitals. Free price

negotia-tionwasextendedtomoreproceduresthatbroughtthe

share of hospital revenues derived from products with

unregulatedpricesto20%.Themethodofpaying

special-istsalsochangedin2008,suchthattheirannualincome

becamecompletelyactivity-based,whichgeneratedstrong

incentivestoincreaseproduction(SchutandVarkevisser,

2013).Theirremunerationrates,however,werestill

reg-ulatedand,therefore,notaffectedbytheoutcomeofthe

insurer-hospitalpricenegotiations.Entrytothehospital

marketbecameeasierfromthatyearbecausegovernment

approval forthe construction ofnew hospitalbuildings

(oradditionalcapacity)wasnolongerrequired.Thiswas

accompaniedbyagradualincreaseintheﬁnancialriskfor

hospitalsbecausereimbursementofcapitalcostswasno

longer(fully)assured.

Although the year-speciﬁc estimates in the bottom

panelofTable3givenoindicationofanysubstantialchange

from2008thatmaybeduetoconfounding,weexamine

therobustnessofourﬁndingstocurtailingthepost-reform

periodto2006–2007.Doingsogivesaninsigniﬁcant

neg-ativepointestimateoftheeffectaveragedoverthesetwo

yearsthatissmallinmagnitude.31 _This_gives _no_reason

tosuspectthataneffectofpricederegulationonthehip

replacementreadmissionrateisbeingconfoundedbyother

policychangesthatoccurredwithinourperiodofanalysis.

6.2.3. 30-dayreadmissionrate

Sincetheoreticalandempiricalgroundsfor

unambigu-ouslypreferringthe90-daytothe30-dayreadmissionrate

asanindicatorofthequalityofcarearelacking,wecheck

robustnesstousingtheshorterperiod.Pre-reformtrendsin

30-dayreadmissionratesarereasonablyparallelbetween

thetreatmentandcomparisongroups,althoughthereis

somedivergencein2004(seeFig.2).Thehypothesisthat

yeareffectsinthe30-dayreadmissionrateareequalfor

thetreatmentandcomparisongrouphospitalsinthe

pre-treatmentperiod isnot rejected(Appendix3, TableA1;

column(ii)),whichlendsplausibilitytothecommontrends

identiﬁcationassumptionforthisoutcomealso.32

Theestimatedeffect onthe30-dayreadmission rate

overthefullpost-reformperiodgiveninthetoppanelof

column(4)ofTable3isabouthalfthemagnitudeofthe

30 _All_three_hospitals_are_in_the_high_HHI_group.

31 _These_results_are_available_from_the_authors_upon_request. 32 _For_both_groups,_the_trends_in_the_30-day_rate_display_greater_volatility

thanthoseforthe90-dayrate,whichisduetothesubstantiallylowerrate ofreadmissionsovertheshorterperiod.Thisgreaternoiseinthe30-day rateisonegoodreasonforrelyingmoreonthe90-dayrate.

baselineestimatedeffectonthe90-dayrateincolumn(1),

whichisduetothelowermeanrateofreadmissionsover

theshorterperiod.Theestimatedeffectonthe30-dayrate

isalsonotatallsigniﬁcant,andsotherecontinuestobeno

evidencethatpricederegulationinmorecompetitive

mar-ketsaffectedthequalityofcare.Theyear-speciﬁcestimates

arenegativein3ofthe5post-reformyears,buttheyare

alwayssmallinmagnitudeandneverclosetosigniﬁcance.

6.2.4. Kneereplacements

Tofurtherassessthecredibilityofourﬁndingofanull

effect,wereplicatetheanalysisforanindicatorofthe

qual-ityofasecondelectiveprocedure–readmissionafterknee

replacement.Withinthesubsetofproductsforwhichfree

pricenegotiationwasallowedfrom2005,knee

replace-ment is theonlyotherprocedurewithsufﬁcientlyhigh

volumeandforwhichareliablequalityindicatorcanbe

constructed.Kneereplacementsandhipreplacementsare

commonlyperformedbythesamespecialty,whichmakes

thisalocaltestofrobustness.Theupsideisthatconsistency

acrossthetwoprocedureswouldlendalotofcredibilityto

theevaluationoftheeffectonthequalityofthetreatment

performedbyaparticularspeciality.We usethe90-day

readmissionrateasthequalityindicator.

Thereadmissionrateafterkneereplacementdisplays

greatervariationfromyeartoyearthantherateforhip

replacements(see AppendixFig.A1),which reﬂectsthe

muchsmallernumberofpatientsundergoingknee

replace-ment.Wecannotrejectthatthetimeeffectsarecommon

betweenthetreatmentandcomparisongroupsinthe

pre-reformperiod(seeAppendixTableA1,column(iii)).The

estimatesoftheeffectonthekneereplacement

readmis-sionratearehighlyconsistentwiththosefortheeffecton

readmissionafterhipreplacement(Table3.Column(5)).

Theestimatedeffectoverthefullpost-reformperiod(top

panel) isveryclosein (small)magnitudetothe

respec-tiveestimateforhipreplacements,onlyitislessprecise

reﬂectingthesmallersample.Aswithhipreplacements,

theestimatedeffectisnegativein2006.Thereafter, itis

positive,exceptfor2009.Overalltheyearsandforeach

year,theestimatedeffectisneverclosetosigniﬁcance.

Irre-spectiveofwhetherreadmissionrateafterhipreplacement

orafterkneereplacementisusedtoindicatequality,there

isnoevidencethatpricederegulationinamore

competi-tivemarketaffectedthequalityofcare.

6.3. Heterogeneity

WhiletheHHIthresholdof2500isbasedonUSantitrust

guidelines,itissomewhatarbitrary,andevenmoresoin

a European context. Further,a binaryclassiﬁcation will

miss any variation in the response to the intensity of

competitivepressureinducedbypricederegulationacross

ﬁnerdegreesofmarketconcentration.Thenulleffectwe

ﬁndcouldpossiblyarisefromdifferentialresponsesatthe

extremesofthemarketconcentrationdistributionbeing

diluted by similar responses either side, but closer to,

the2500threshold.Totestforthis,wecategorize