Academy Health Annual Research Meeting Saturday, June 7, 2008 Washington, DC

1. Health Economics Interest Group Meeting Patient choice when prices don’t matterWhat do time-elasticities tell about hospitals’ market power? Academy Health Annual Research Meeting Saturday, June 7, 2008 Washington, DC Marco Varkevisser (Erasmus University Rotterdam) Contact: varkevisser@bmg.eur.nl 1

2. Outline • Background • Model • Empirical specification • Data • Estimation results • Substitutability of Dutch hospitals? • Concluding remarks 2

3. Background • Health system reform in The Netherlands • Introduction of managed competition • Van de Ven and Schut (2008, HA) • How to assess Dutch hospitals’ market power? • Prices for most hospital services are still fixed • Out-of-pocket payments are absent • Patients do not yet face restricted provider networks • Varkevisser, Capps and Schut (2008, HEPL): • “As a result, in the current context, the time-elasticity approach seems to be the appropriate approach to defining hospital markets in The Netherlands.” 3

4. The model • Based on standard patient utility function • Following previous studies for US hospital choice • Utility patient i visiting hospital j is given by • Travel time (tij) and hospital attributes (Hj) as main determinants of patient hospital choice • Prices are not included since these are irrelevant • Interaction terms to capture patient heterogeneity 4

5. Empirical specification • Conditional logit model (McFadden, 1974): • Travel time (tij) • Hospital attributes (Hj) • Type, size, reputation, and waiting time • Patient characteristics (Pi) • Gender, age (adult vs. non-adult), and social status • Probability that patient i selects hospital j 5

6. Data • Individual patient level data from large Dutch health insurer • Non-emergency first outpatient hospital visits for neurosurgery in 2003 • Patients travelling > 60 minutes are excluded • Patient i’s choice set = all hospitals ≤ 60 minutes • On average, the choice set includes 26 hospitals • Resulting study sample contains 5,389 visits • Mean travel time  19 minutes • For 95% of the patients travel time ≤ 45 minutes 6

7. Estimation results: summary • Estimation results • Hausman-McFadden test: • IIA assumption seems to hold here • Brief summary of estimated parameters • Coefficient for travel time is negative and significant • Patients are less likely to visit academic medical centre • Overall reputation and waiting time affect choice • Several patient attributes seem to affect hospital choice • Model predicts patients’ actual choices fairly well • 43% visited hospital with the highest probability 7

8. Estimation results: detailed coefficients 8

9. Substitutability of Dutch hospitals? • Time-elasticities as an attempt to indirectly estimate hospitals’ demand elasticities • Details: Capps et al. (2001, NBER) • Estimation of hospital j’s isolated time-elasticity 1. Assign all patients to hospital with highest probability 2. Artificially increase travel time to hospital j by 10% 3. Predict hospital j’s “new” market share 4. Divide ∆% market share by ∆% travel time 9

10. Dutch hospitals’ isolated time-elasticities 10

11. A closer look at hospitals’ substitutability… 11

12. A closer look at hospitals’ substitutability… 12

13. Sensitivity test: Monte Carlo simulation 13

14. Concluding remarks • From our simulations it follows that: • Point estimates of Dutch hospitals’ isolated time-elasticities range from -0.6 to -5.6 • Estimated time-elasticities are overall fairly high, but some hospitals may have market power • Overall, estimated time-elasticities are robust • Time-elasticity approach has the potential to become a useful instrument for assessing Dutch hospitals’ substitutability • To health insurers as well as antitrust agencies 14