Endogenous Quality Investments in the U.S. Hospital Market (WP-20-32)
Craig Garthwaite, Christopher Ody, and Amanda StarcHigh and increasing hospital prices have led to calls for price regulation. If prices are high because of consolidation, regulating prices could enhance welfare. However, high prices could also reflect increased willingness to pay by privately insured consumers for clinical and nonclinical quality. If so, regulating prices could reduce quality. The researchers present a model of strategic quality choice where hospitals make quality investments to increase private revenue. They confirm the model's predictions across 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.