Abstract
In health care, many aspects of the delivery of services are subject to regulation. Often the purpose of the regulated health care system is to encourage providers to keep costs down without skimping on quality. The purpose of this paper is to analyse the effect of price regulation and free choice on quality in physiotherapy organised by the Social Insurance Institution of Finland for the disabled individuals.We use the difference-in-differences method in our effort to isolate the effect of the regulation and for this task we have defined the regulated and non-regulated firms and their quality before and after the regulation. The variables needed in the econometric modelling were collected from several registers as well as by carrying out questionnaires on the firms.We show that price regulation decreased quality in physiotherapy statistically significantly and the mechanism was unable to incentivise firms to invest in quality. Most likely, our results are caused by cost reduction associated with price regulation. It seems that cost reduction was carried out through quality reductions in physiotherapy instead of increasing productivity. The result is sensible because comparable quality information is not published to support patient choice in this sector.
Highlights
The main purpose of the regulated health care system is to encourage providers to keep costs down without skimping on quality
The aim was to test which theoretical prediction dominated in the market – price regulation and the possibility to cut costs through quality or quality competition, which by the general theory of competition with fixed prices should enhance quality unless factors such as imperfect information influence the incentives of firms
Our study shows that quality was decreased due to the reform which regulated prices and initiated free choice of patients
Summary
The main purpose of the regulated health care system is to encourage providers to keep costs down without skimping on quality. When government agencies or insurers are purchasing health services they usually try to keep costs down without decreasing quality [1]. Due to changes in the financial incentives, firms may alter their behavior regarding quality. This means that firms may have an incentive to decrease quality in order to cut the costs instead of improving productivity [2]. Price regulation is recommended in the literature to be linked to elements affecting competition such as free choice. In this scenario, competition will outweigh a firm’s possible incentive to seek cost reductions through quality [3]
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