Gatekeeping in health care

Abstract

We study the competitive effects of restricting direct access to secondary care by gatekeeping, focusing on the informational role of general practitioners (GPs). In the secondary care market there are two hospitals choosing quality and specialization. Patients, who are ex ante uninformed, can consult a GP to receive an (imperfect) diagnosis and obtain information about the secondary care market. We show that hospital competition is amplified by higher GP attendance but dampened by improved diagnosing accuracy. Therefore, compulsory gatekeeping may result in excessive quality competition and too much specialization, unless the mismatch costs and the diagnosing accuracy are sufficiently high. Second-best price regulation makes direct regulation of GP consultation redundant, but will generally not implement first-best.

Introduction

The UK and the Scandinavian countries are examples of countries where general practitioners (GPs) have a gatekeeping role in the health care system. Patients do not have direct access to secondary care. They need a referral from their (primary care) GP to get access to a hospital or a specialist.¹ In the US, several health maintenance organizations (HMOs) also practice gatekeeping. Recently, however, some HMOs have relaxed the restrictions on access to specialists (see, e.g., Ferris et al., 2001). In Germany, patients need a referral to get access to a hospital and it has been on the political agenda to also restrict direct access to specialist care by giving GPs a gatekeeper role. The international experience with gatekeeping thus appears to be mixed: while some countries relax gatekeeping regulations (e.g., the US), others seem to move towards stricter rules (e.g., Germany). The current paper contributes to the discussion on gatekeeping by analyzing the competition effects that arise when GPs are equipped with a gatekeeping role.

In general, there are two main arguments for introducing gatekeeping in health care markets (see Scott, 2000). First, it is usually claimed that gatekeepers contribute to cost control by reducing ‘unnecessary’ interventions.² Second, it is argued that secondary care is used more efficiently since ‘GPs usually have better information than patients about the quality of care available from secondary care providers’ (Scott, 2000, p. 1177). In the present paper, we focus on the second argument, highlighting the fact that making this information available to patients changes the nature of competition between secondary care providers, which in turn affects the social desirability of gatekeeping.

As pointed out in a seminal paper by Arrow (1963), uncertainty and various informational problems make health care markets distinctly different from most other markets. The present paper stresses the importance of non-price competition between health care providers, as well as the role of imperfect information in the relationship between patients and providers. Building on the familiar model of Hotelling (1929), we consider a secondary care market with two providers (hospitals). In order to attract patients (and obtain third party payments) the hospitals have two strategic variables at their disposal: location and quality of care. We refer to location as the specialization or service mix at a hospital, though it may also be interpreted in geographical terms. Thus, hospitals engage in non-price competition in terms of both horizontal and vertical differentiation of services.

The major aim of the paper is to highlight the informational role of GP gatekeepers in secondary care markets. We assume that patients are ex ante uniformed about their specific diagnosis and the exact characteristics of the hospitals. Thus, if they access secondary care providers directly, their choices may be subject to substantial errors. First, a patient may end up in a poor match, i.e., he may choose the hospital that is less able to cure his disease. Second, he may decide to go to the hospital that provides the lower quality of care. To reduce the risk of choosing the ‘wrong’ hospital, patients may therefore (at some costs) consult a GP first. The GPs are informed agents (middlemen) and convey accurate information about hospital characteristics, i.e., quality and specialization. They also give attending patients a noisy diagnosis. Thus, the GPs are imperfect agents in the sense that diagnosing accuracy is not perfect.³ We abstract from any moral hazard problems that may originate in the agency relationships between players.⁴ When deciding whether to consult a GP or to approach a hospital directly, patients simply weigh the consulting costs against the reduction in (expected) mismatch costs due to better information.

The analysis is focused on two basic questions. (i) How does GP gatekeeping affect hospitals’ incentives to specialize and to invest in quality? (ii) Is strict gatekeeping – i.e., no access to secondary care without a GP referral – socially desirable? The answers to these two questions are closely connected. Concerning the first question, we show that a higher GP attendance rate amplifies quality competition and induces the hospitals to specialize their services. The former is explained by the fact that informed patients are sensitive to quality differences, while uninformed patients are not. The latter is due the fact that hospitals can dampen quality competition by specializing their services.⁵

Interestingly, the other information variable – diagnosing accuracy – has the exact opposite effect. When diagnosing accuracy is low, patients attending a GP put a larger weight on quality differences than hospital specializations, since the probability of a wrong diagnosis is high. As a consequence, improved diagnosing accuracy tends to weaken quality competition and, in turn, the corresponding incentives for specialization. However, improved diagnosing accuracy also increases the benefit of consulting a GP, leading to higher GP attendance, which, in turn, increases hospital competition. Thus, when the patients’ decision of whether or not to attend a GP is endogenized, the latter (indirect) effect of improved diagnosing accuracy on hospital competition tends to counteract the former (direct) effect.⁶

Regarding the second question, numerical simulations of our model suggest that strict gatekeeping is detrimental to welfare unless mismatch costs and diagnosing accuracy are sufficiently high. The reason is that both low mismatch costs and low diagnosing accuracy trigger hospital competition. Since higher GP attendance has the same directional effect on competition, as explained above, strict gatekeeping tightens hospital competition even further. As a consequence, hospitals engage in excessive competition, resulting in too high quality and too much specialization from a welfare perspective.⁷

The regulator (payer) determines the hospital reimbursement by setting a (prospective) price per treatment (or patient). We show that if second-best price regulation is available, then there is no scope for direct regulation of GP attendance. Thus, the treatment price is a sufficient instrument to induce second-best optimal quality and specialization of hospital care. Finally, we characterize the second-best equilibrium, showing that first-best is generally not achievable for the regulator.

The paper relates to both the general literature on spatial competition and the literature on (imperfect) competition in health care markets. The interaction between quality and location choices has been investigated by Economides (1989) under price competition and Brekke et al. (2006) under price regulation.⁸ The present paper contributes to this literature by introducing imperfect information into the framework. As previously mentioned, we find that the hospitals’ incentives to differentiate services crucially depend on the degree of information in the market. In particular, we find that the presence of uninformed consumers tends to soften the incentives for horizontal differentiation. In this respect our findings are in the spirit of Bester (1998), who shows that quality competition may induce minimum differentiation – i.e., agglomeration at the market center – when consumers are uncertain about product quality and use observed prices to ascertain the quality of goods.

The paper also relates to the more general literature on transparency in imperfectly competitive markets.⁹ Increased transparency on the consumer side of the market typically leads to intensified price competition and thus to a more socially desirable market outcome. Our paper contributes to this literature by analyzing the effects of improved transparency in markets that are characterized by non-price competition. In this case, more intense competition between firms does not necessarily improve social welfare. Improved market transparency consequently has ambiguous welfare effects.¹⁰

Finally, our paper complements the multi-task agency literature on the economics of general practice, e.g., Garcia Mariñoso and Jelovac (2003), Malcomson (2004) and González (2006). These papers focus on the dual nature of GP activity, namely, on diagnosing patients and treating or referring them. Optimal payment systems are derived that, at the same time, induce GPs to exert diagnosis effort and give incentives for efficient referral or treatment decisions, i.e., GP treatment for low severity diagnoses and referral for high severity diagnoses.¹¹ This also refers to the second gain of gatekeeping: the allocation of patients to health care sectors improves since patients more appropriately treated by a GP are screened out through costly diagnosing of all patients. On the other hand, as Malcomson (2004) points out, patients who would not otherwise have been referred, may be referred after being subject to costly diagnosis. Again, health care is used more efficiently. In our paper, GPs are – on the one hand – perfect agents in the sense that they truthfully convey the information about the secondary care market that they have, but – on the other hand – imperfect agents in the sense that diagnosing is noisy. Although we consider diagnosing accuracy to be exogenous, it can, in fact, be seen as a result of an incentive contract like the ones derived in the above cited papers. Instead of analyzing whether or not a patient should be referred to a hospital, we consider that all patients will be referred and concentrate on the improved matching of patients to hospitals through gatekeeping GPs.¹² Although important for the social desirability of gatekeeping, this has not been analyzed before. Moreover, we explicitly model the secondary care sector and introduce imperfect competition, and thereby significantly advance the literature. We demonstrate that the information acquired through gatekeeping affects competition amongst secondary care providers and that this may generate – so far neglected – (adverse) effects of such a system.

The remainder of the paper is organized as follows. The basic framework is presented in Section 2. In Section 3, we analyze hospitals’ incentives for specialization and quality investments for a given GP attendance rate. In Section 4, we endogenize the GP attendance rate and characterize the corresponding specialization–quality–consultation equilibrium. Section 5 is devoted to welfare effects of gatekeeping and regulation of GP attendance, as well as second-best price regulation. Finally, in Section 6, we provide some concluding remarks.