Endogenous Quality Investments in the U.S. Hospital

Abstract

High and increasing hospital prices could reflect market imperfections, including provider concentration. Yet high prices could also reflect increased willingness to pay by privately insured consumers for clinical and non-clinical quality. In this paper, we explore strategic quality choices where hospitals make quality investments to increase private revenue. We then measure the relationship between potential prices and numerous quality measures including patient satisfaction, hospital processes, risk-adjusted mortality, the revealed preferences of current Medicare patients, technology adoption, physician quality, and ED wait times. We show that across a range of measures quality is correlated with the profitability of the payer mix: hospitals with more potential privately insured patients are of higher quality.

Keywords: analysis of health care markets, public and private health insurance