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Does hospital competition lead to medical equipment expansion? Evidence on the medical arms race

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Abstract

With the implementation of a series of pro-competition policies in China, the hospital market competition has been intensified dramatically over the past decade. Based on previous literature, such competition is very much likely to bring about an upgoing trend in the promotion and expansion of medical facilities among hospitals as an essential strategy for attracting patients, which is known as Medical Arms Race (MAR). Comprehensive evaluations have been conducted by previous studies on the consequences of the MAR, which, however, merely provided inadequate empirical evidence on the relationship between hospital competition and MAR. Utilizing the variations in hospital competition across various regions and through different time periods in Sichuan Province as a prototype representative of the nationwide situation, a dynamic panel data model was established and adopted in this study for investigating whether intensified hospital competition had resulted in the expansion of medical facilities in China during the corresponding time period. The geopolitical boundaries and Herfindahl-Hirschman Index (HHI) were respectively employed to define the hospital market and measure the competition degree. We found that a 10% reduction in HHI is associated with an 8.79% increase in regional total costs of advanced medical equipment per capita, suggesting that hospital competition would lead to medical equipment expansion. Our results provide novel evidence on MAR which is particularly applicable for the healthcare system in China, providing suggestions for nationwide healthcare reform in order to mitigate potential negative outcomes induced by the implementation of pro-competition policies.

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Notes

  1. The datasets adopted for analysis in this research were secondary data extracted from the Sichuan Provincial Health Statistics Support System Database under the management of the Health Commission of Sichuan Province, China. All data were de-identified and the manuscript does not contain any individual data. Therefore, this study was exempted from ethics approval.

  2. We used the following two methods to verify that our data is missing randomly. First, the summary statistics of the variables in our study with or without removing the observations with missing values were compared. Appendix Table A shows the statistics without removing the observations with missing values, while Table 1 shows the statistics after removing. We found that the distribution of all variables demonstrated little change after removing the observations with missing value. Second, we also employed the linear interpolation method to fill the missing values. In this case, the observations with missing values were not removed. Appendix Table B shows the estimation results using the new set of observations. The estimations are similar to our main analysis.

  3. We also used the quantity of advanced medical equipment as the dependent variable to validate the robustness of our results. The results are similar to our main analysis using AME as the dependent variable, thus supporting our findings that market competition would lead to medical equipment expansion. These results are shown in Supplementary Table 1 in the supplementary file.

  4. In China, the medical device with single values exceeding 10,000 Yuan (about 1450 dollars) is required to be reported annually to the Health Commission by the hospital, while most of the medical equipment less than 10,000 Yuan are considered as consumable medical equipment purchased as part of hospitals’ regular budgets and are therefore not required to be reported regularly. Based on such circumstances, medical devices costing more than 10,000 Yuan are considered as reflective of hospitals’ behaviors of purchasing expensive medical equipment that is typically not purchased by hospitals as necessities, which is therefore considered as highly correlated with the behavior of purchasing advanced medical equipment. In this study, medical devices costing more than 10,000 Yuan were used as the indicator of purchasing advanced medical equipment which further reflected the degrees of MAR.

  5. All monetary variables in the statistical description were adjusted using the consumer price index (CPI) with 2016 = 100 (the ending of the study period) for the convenience of viewing the changing trend, while in the regression analysis, there was no need CPI adjustment after adding year dummy variables and taking log transformation for the monetary variables.

  6. According to the literature, if no estimation bias caused by weak instrumental variables existing, the GMM estimator of the lagged dependent variable would range between the OLS estimator and FE [40, 50]. The results also suggest that there is no estimation bias caused by weak instrumental variables. In addition, to test the validity of the IV used in the system GMM in the study, we also fitted the regression model with the endogenous variables and instrumental variables to simulate the first stage of GMM. The F statistics and the coefficient of IV are both significant at 1% level in the difference and level equation, supporting the validity of the IV used in the system GMM in the study.

  7. According to the partial adjustment model, the coefficient of the lagged dependent variable would be impacted by other control variables, such as the hospital market competition. For example, the coefficient α would have different values in markets at different competition degrees.

  8. The estimations of TAME are shown in Supplementary Table 2 in the supplementary file.

  9. Since the lagged dependent variable and lagged HHI would be strong collinearity, we exclude the lagged dependent variable and employ the fixed effects model to analyze.

  10. The basic health insurance programs include urban employee basic medical insurance, urban residence basic medical insurance, and new rural cooperative medical insurance. More than 95% of citizens in China are covered by basic health insurance [7].

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Acknowledgments

We thank the National Natural Science Foundation of China (Grant No. 71874116 and 72074163), Ministry of Education of China (Grant No. 18YJA790062), Chengdu Federation of Social Science Association (Grant No. ZZ05), Sichuan University (Grant No. 2018hhf-27 and SKSYL201811), and China Medical Board (Grant No. 17-276) for their financial support. We would like to thank Yili Yang from Sichuan University for her excellent proofreading, Xiaojun Lin, Chu Chen, Qian Zhou, and Tianjiao Lan from Sichuan University for their valuable comments on the manuscript.

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  1. West China School of Public Health and West China Fourth Hospital, Sichuan University, Chengdu, 610041, China

    Liyong Lu & Jay Pan

  2. Institute for Healthy Cities and West China Research Center for Rural Health Development, Sichuan University, Chengdu, 610041, China

    Liyong Lu & Jay Pan

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Table 8 Descriptive statistics without removing the observations with missing values
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Table 9 Regression results with filling the missing values
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Lu, L., Pan, J. Does hospital competition lead to medical equipment expansion? Evidence on the medical arms race. Health Care Manag Sci 24, 582–596 (2021). https://doi.org/10.1007/s10729-020-09529-x

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