Quality discrimination in healthcare markets

Recent advances in healthcare information technologies allow healthcare providers to more accurately track patient characteristics and predict the future treatment costs of previously treated patients, which increases the scope for providers to quality discriminate across different patient types. We theoretically analyze the potential implications of such quality discrimination in a duopoly setting with profit-maximizing hospitals, fixed prices, and heterogeneous patients. Our analysis shows that the ability to quality discriminate tends to intensify competition and lead to higher quality provision, which benefits patients but makes the hospitals less profitable. Nevertheless, the effect on social welfare is a priori ambiguous, since quality discrimination also leads to an inefficient allocation of patients across hospitals.