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The Effects of Competition on Variation in the Quality and Cost of Medical Care


  • We thank Jeanine Balbach, Harrison Hong, David Hyman, Paul Pautler, Jane Ruseski, Bill Sage, Dave Scheffman, Mike Vita, Bill Vogt, and Joel Waldfogel for helpful discussions, and the Federal Trade Commission and the National Institute on Aging through the NBER for generous support. David Becker provided exceptional research assistance. The views expressed in this paper do not necessarily reflect those of any of the author's institutions or the Federal Trade Commission.


We estimate the effects of hospital competition on the level of and the variation in quality of care and hospital expenditures for elderly Medicare beneficiaries with heart attack. We compare competition's effects on more-severely ill patients, whom we assume value quality more highly, to the effects on less-severely ill, low-valuation patients. We find that low-valuation patients in competitive markets receive less intensive treatment than in uncompetitive markets, but have statistically similar health outcomes. In contrast, high-valuation patients in competitive markets receive more intensive treatment than in uncompetitive markets, and have significantly better health outcomes. Because this competition-induced increase in variation in expenditures is, on net, expenditure-decreasing and outcome-beneficial, we conclude that it is welfare-enhancing. These findings are inconsistent with conventional models of vertical differentiation, although they can be accommodated by more recent models.