Essays on the Industrial Organization of Health Care

This dissertation explores the industrial organization of two U.S. health care markets, outpatient dialysis and long term acute care hospitals, and examines how health care provision responds to market structure, ownership structure, and economic incentives. The first chapter introduces the research agenda presented in this document.

The second chapter looks at whether dialysis quality in the U.S. is an outcome of market structure and competition. This analysis uses a rich panel from the United States Renal Data System (USRDS) that includes data on virtually the universe of dialysis patients and providers in the U.S. from 1998 to 2012. I find that providers are able to exercise market power by reducing the clinical quality of dialysis and still capturing market share. This is possible because patients have horizontal preferences (travel costs) and often face congestion at dialysis facilities. Both of these sources should be considered when developing policies aimed at improving quality or access in this industry. I develop and estimate an entry game where providers choose capacity and compete on quality. I use the model to simulate policy counterfactuals that explore how to cost-effectively promote quality and access in dialysis. My simulation results reveal that offering providers more money for dialysis produces small improvements in patient welfare because providers are able to use local market power to capture the majority of the surplus such policies. However, policies targeting the sources of market power, such as subsidizing travel, provide more cost-effective improvements.

The third chapter explores the transference of corporate strategies to dialysis facilities that are acquired by for-profit national chains. I find evidence showing how acquired facilities change their internal practices to resemble facilities previously owned by the chain. These changes increase the revenue productivity of the acquired facility but yield weakly worse patient outcomes along many measures.

The final chapter examines the impact of Medicare's prospective payment system for long-term acute-care hospitals (LTCHs) on the timing of patient discharge. This payment policy provides modest per-diem reimbursements at the beginning of each patient's stay before jumping discontinuously to a large lump-sum payment after a pre-specified number of days. I find that LTCHs respond to the financial incentives associated with this system by disproportionately discharging patients shortly after they qualify for the lump-sum payment. I find that this occurs more often at for-profit hospitals, chain hospitals, and hospitals co-located with general hospitals. I then estimate a dynamic structural model to evaluate counterfactual payment policies that would provide substantial savings for Medicare.