Freedom of Choice, Asymmetric Information and the Impact of Competition on the Quality of Health Care: Evidence from Italy

In this paper we study the impact of competition on hospital performance, and how this is related to information gathered by patients on hospital quality, using data on patients’ admitted to hospitals located in the Lombardy region, Italy. To this end, we first estimate a model of patients’ hospital choice, and include among the determinants a variable capturing social interaction, which represents a proxy for the quality of hospitals perceived by patients. In the Lombardy region, although risk-adjusted hospital rankings are estimated yearly, these are only provided to hospital managers, while they are not available to GPs and citizens. This is a clear source of asymmetric information. Using patients’ predicted choice probabilities we construct a set of indices of competitiveness and measure their impact on health outcomes. We then move a step forward and try to explain the mechanisms underlying the impact of competition on hospital quality. In particular, we investigate the channels through which patients gather information on where to be admitted, and examine how these affect hospital competition, ultimately impacting on quality. The lack of publicly available information on the quality of hospitals may exacerbate the influence of information gathered locally, and may result in reduced freedom of choice of patients, lower degree of competition among hospitals and lower quality. Such analysis may shed light of why empirical literature often rejects the theoretical result that more competition should lead to better health, when prices are fixed.