Quality Transparency and Healthcare Competition

Abstract

Transparency about the quality of goods and services offered by firms improves consumer decisions; however, it also informs competitors. We study the effect of an increase in information about the quality of healthcare services on competition and, subsequently, on the quality of care. In 2012, healthcare regulators began measuring and publicly disclosing information about the healthcare quality of all US dialysis facilities. Using a difference-in-differences design, as well as an instrumental variables approach based on emergency room referrals, we show that improved quality transparency (i) prompts new entry by competitors nearby low-quality incumbents, and (ii) increases the sensitivity of demand to quality, reflected in a reduction in patient referrals to lower-quality incumbents. We also find that enhanced transparency improves the incumbents' quality of care via its effect on competition evidenced by reduced hospitalizations and increased investments in skilled labor. Overall, we conclude that disclosure policies can be an effective tool to stimulate healthcare competition and discipline quality.

Note:
Funding Information: We gratefully acknowledge financial support from the University of Chicago Booth School of Business and the Stanford Graduate School of Business, as well as excellent support from the Chicago Booth Healthcare Initiative.

Declaration of Interests: None to declare.

Keywords: Healthcare, dialysis treatment, competition, transparency

JEL Classification: D83, G14, L14, M41