Seminar on "How Do Hospitals Respond Differently to Competition?"

This paper investigates possibly heterogeneous responses of hospitals to competition using a data set of Chinese hospitals over 2007-2014. Utilizing the graded hospital system certified by the Chinese government, we refine the competition measure by using the number of grade-specific hospitals and further adjusting distance, specialties similarity and hospital size. To address the potential endogeneity of market structure, we identify the impact of competition using a set of policy changes in 2009 which upgraded existing hospitals and encouraged entry of new hospitals. We find that the highest-graded hospitals reduce user charges in response to competition, whereas lower-graded hospitals choose to improve quality of hospital care (measured by emergence department mortality and nurse-to-bed staffing ratio). We also find hospitals of different grades make changes in operations (expenses per admission, bed utilization rate, and scope and specialization of specialties) related to their main responses (quality or price) to competition. These findings provide a fuller and more nuanced picture of how hospitals respond differently to competition.