Out-of-Pocket Expenditures on Medical Supplies and Competition in Hospital Quality

We examine the relationship between healthcare competition and hospital quality that incorporates out-of-pocket expenses on medical supplies. The results show that when patients and insurance companies pay for medical supplies, hospital quality can go either direction as the market becomes competitive. Hospital quality is determined by market competition, medical service reimbursements, and low-quality medical supplies by insurance companies. Market competition will not increase hospital quality if medical supplies are paid out of pocket. When the insurance company pays for medical supplies, market competition will not lower hospital quality. Medical arms races may not occur when out-of-pocket expenses on medical supplies are considered.