Privatization in the health care market. Implications for hospital quality, choice of reimbursement system and welfare

This project aims at shedding light on how increased competition, elicited by the opening up for private hospitals, might affect (1) hospital quality, (2) the choice of provider reimbursement for private and public hospitals and (3) social welfare. What we observe is increased competition between health care providers with different objectives. Most of the IO literature analyzes price competition between firms in mixed oligopolies. However, in the Nordic health care markets the government typically sets prices, and firms engage in both non-contractible quality competition and product differentiation of their services. To address the above research questions, we model this situation as a four-stage game where, first, the regulator sets a (welfare)-maxim izing reimbursement scheme for the providers, second, public and private health care providers decide whether to enter the market and where to locate (horizontal product differentiation), third, providers set the level of quality provided (vertical produc t differentiation), and, fourth, patients choose which provider to visit. We examine two models. The first one deploys a Hotelling model of spatial competition with one public and one private provider. Here, we study the impact of ownership structure and provider reimbursement on the nature of product and quality competition. The second model considers a situation where a public provider is already established at the center of the market, and private (for profit) providers consider whether to enter on th e (Salop) circle (Bouckaert, 2000). The regulator determines the reimbursement scheme and may also regulate the number of private providers that are permitted to enter in order to maximize social welfare. While the first model allows for independent decis ions between the public and the private hospital, the second model assigns a central position to the already existing public hospital.