Does a hospitals quality depend on the quality of other hospitals? A spatial econometrics approach to investigating hospital quality competition

We examine whether a hospitals quality is affected by the quality provided by other hospitals in the same market. We first set out a theoretical model with regulated prices which specifies conditions on demand and cost functions which determine whether a hospital will have higher quality when its rivals have higher quality. We then apply spatial econometric methods to a sample of English hospitals in 2009-10 and a set of 16 quality measures including mortality rates, readmission, revision and redo rates and three patient reported indicators to examine to examine the relationship between the quality of hospitals. We find that a hospitals quality is positively associated with the quality of its rivals for seven out of the sixteen quality measures and that in no case is there a negative association. In those cases where there is a positive association, an increase in rivals quality by 10% increases a hospitals quality by 1.7% to 2.9%.