A THEORY OF HOSPITAL MARKET CONCENTRATION: PATIENTS, PHYSICIANS, AND THE HOSPITAL AS A PLATFORM
In this month’s edition of the NOVA SBE HEALTH ECONOMICS & MANAGEMENT SEMINAR SERIES, Luís Sá, PhD in Economics from the University of Minho, whose research interest lie in the boundary between Industrial Organization and Health Economics, will discuss: A Theory of Hospital Market Concentration: Patients, Physicians, and the Hospital as a Platform
ABSTRACT:
Increasing concentration has been a defining feature of U.S. hospital markets over the past two decades; Europe appears to follow a similar path. Meanwhile, hospitals account for a growing share of physician employment. These market dynamics may be explained by the decades-old wave of hospital mergers and the resulting increase in hospital market power, which subsequently spills over into the physician labor market.
This article puts forward an alternative theory of hospital market concentration based on network effects. Here, hospitals are modeled as two-sided platforms that facilitate (and monetize) the interaction between patients and doctors. Whereas sufficiently strong network effects may lead to the winner-takes-all outcome observed in some hospital markets, horizontal differentiation—another defining characteristic of such markets—has long been shown to prevent it.
We reconcile these two facts by looking at exogenous demand asymmetries, and attempt to establish under what conditions a single hospital arises as the unique provider in a market.
OVERVIEW OF THE PRESENTATION:
Update! Our seminar in January on hospital market dynamics was a huge success!
🏥💡 Luís Sá elaborated on the trends of increasing hospital concentration in U.S., a tendency that is slowly gaining terrain in Europe as well. The presentation focused on an novel theoretical framework of market concentration based on network effects between physicians and patients, with intriguing insights into winner-takes-all outcomes and horizontal differentiation in hospitals.
On a more technical view, the work by Luis Sá takes the view of the hospital as a market (aka platform), that is, a meeting point of doctors and patients that leads to concentration. The initial motivation comes from the American context. We can take it to the Portuguese context (or European) in the sense that the private sector needs to offer enough case load to doctors to be able to recruit them (at least in some medical specialties, this may be true. This would correspond to the trend of large private health care providers buying smaller clinics all over the country, which allows them to generate enough demand for elective procedures and works as incentive to concentration. Patients more likely to buy health plans and health insurance, be loyal due to provider of insurer that provides access to a larger base of doctors. The public sector is already concentrated by nature, the private seems to start battling that concentration in some areas.
The model by Luis Sá addresses the point of how competition for professionals (medical doctors) unfolds, in a context of asymmetric demand. The asymmetry in demand for the services of one provider gives it an advantage in offering better wages. In a frictionless world this may lead to a fully concentrated market (that is, all doctors end up in one provider only). However, if patients have a preference, for whatever motive, including geographic location, for one of the providers, and these preferences are heterogeneous (different patients have different preferences), that feature may counteract enough on the network externality (of more patients providing more revenues to have better wage offers that attract more doctors that attract more patients etc…)
The paper looks at the forces for market concentration (at the moment, related to the market for health professionals / doctors). In a broad sense, the analysis explores the analogy of the hospital as a platform (similar to technological platforms) that matches patients and doctors. Technically, there is a tension between network externalities, that favors concentration, and horizontal differentiation, that works in the opposite direction. Understanding how those forces operate, and under which conditions extreme concentration is likely to emerge is the main contribution of the analysis done so far (the draft version is preliminary, and more features will be added to the analysis).
In terms of practical relevance, the model may help us understand the dynamic forces for health professionals in the choice between the public and the private sector to work. The buildup of critical mass in the private sector of health care provision may trigger a movement of change from public to private, driven by the wage differential but also by the critical mass/network effects. Thus, observed wage differentials may underestimate the interest of health professionals (medical doctors in particular) of choosing the private sector. As a second implication, fostering network effects in the NHS in some way is also a way for the public sector to compensate for wage differentials. This also raises the hypothesis that technological evolutions that decrease the role of critical mass of health professionals (traditionally more concentrated in the public sector) will lend itself to increased choice of the private sector (even if the wage differential does not change).
Stay tuned for more groundbreaking research on healthcare economics! #HospitalMarkets #HealthcareEconomics #Research
ABOUT LUIS SÁ:
Luís Sá is an “applied theorist” whose research interest lie in the boundary between Industrial Organisation and Health Economics. Luís received his PhD in Economics from the University of Minho, where he was supervised by Odd Rune Straume and where he currently researches and teaches. Luís has studied how the interaction between hospitals determines waiting times and quality provision in competitive settings which reflect healthcare markets attributes such as demand inertia, the complexity of assessing the quality of care, the departure from pure profit-maximisation, and regulatory constraints. Recently, he has also taken an interest in Behavioural Experiments in Health.
Last year Luís won the Pedro Pita Barros Award 2022 at the National Conference of Health Economics organized by APES (Associação Portuguesa da Economia da Sáude)