Is Hospital Competition Socially Wasteful?

Daniel Kessler & Mark McClellan research on the effects of the competition among hospitals on the heart patients from 1985 to 1994. Healthcare is an essential part of the current economic and social welfare. With the increased expenditure on this sector, many hospitals compete for the patients, especially those with conditions that require management like heart ailments. Daniel P. Kessler and Mark B. McClellan look at some of the exogenous factors that influence patients’ decisions on the choice of specific hospitals. As per their study, social effects of the hospital competition in the 1980s were not clear, making it difficult for researchers to come up with positive conclusions. Kessler & McClellan find out that hospital competition effects in the 1990s were traceable, studies showing an improvement in the social welfare of the patients.

Kessler and McClellan’s work shows that in the 1990s, social welfare improved from hospital competition; however, the conclusion can be analyzed in terms of significant determinants. Microeconomics display that competition can either lead to improved or reduced social welfare. For instance, Gruber (1994) notes that insurance and tax incentives are some of the major determinants that have made consumers less sensitive to the cost of healthcare. Many hospitals get reimbursements in a way that makes them not bear the marginal cost of some of the medical decisions (Enthoven & Singer, 1997). Competition can be socially wasteful in instances where the social cost of production is less than the intensity of the care. Health outcomes of the patients should be more than the intensity of the competition for benefits to occur. On that note, Daniel P. Kessler and Mark B. McClellan’s research must weigh the results and conclusion as per patients’ health outcome. A relationship between insurance and care management concerning the price may affect social welfare. Most of the hospitals may only compete in terms of the numbers but not as per the health outcome (Enthoven & Singer, 1997). When such competition happens, then it leads to social waste.

Hospital services can never be taken to be fit in a perfectly competitive market situation. The research shows an improvement in social welfare in the 1990s indicates that certain coordinated activities can be regulated to add more benefits. Most of the patients in this research are the elderly with heart conditions. The 10-year study only covers the patients with managed-care insurance. This means that the study fails to cover some of the patients with no insurance coverage. The research fails to study hospital competition for those patients without insurance.

However, the improved social welfare after the 1990s is an indication of the benefits that accrue from organized healthcare systems. The research indicates that the ambiguous nature of the competitive aspects made it difficult to point out some of the benefits. In effect, the cost of healthcare increased for the elderly with heart diseases. According to Enthoven & Singer (1997), the changes in the sector in the 1990s came from the order and better management of the systems. More people went for the insurance coverage; government involvement also helped in building up a better system. With operations in place, hospital competition has been orderly, leading to a reduction in the cost of healthcare. The social benefits come from the quality service provision that leads to a better medical outcome. The more patients enroll for medical care, the more the social benefits within a given state.


Enthoven, A. & Singer, S. (1997). “Markets and Collective Action in Regulating Managed Care.” Health

Affairs, 16; 26-32

Gruber, J. (1994). “The Effect of Price Shopping in Medical Markets: Hospital Responses to PPOs in

California.” Journal of Health Economics, 38; 183-212.