Quality discrimination in healthcare markets

Esteves, R. B., Ghandour, Z., & Straume, O. R. (2025). Quality discrimination in healthcare markets. Journal of Economics and Management Strategy, 34(1), 24–41. https://doi.org/10.1111/jems.12572This article examines how hospitals use quality discrimination to treat different patient types under fixed-price, competitive market conditions. Recent advances in health information technologies—such as electronic medical records and Big Data—enable hospitals to predict future treatment costs and distinguish between new and returning patients, including their cost profiles. The authors explore three scenarios: uniform quality (no discrimination), one-dimensional discrimination (new vs. returning patients), and two-dimensional discrimination (adding patient cost types). The study finds that quality discrimination increases overall care quality, benefitting all patients, including high-cost ones, though they still receive lower quality than low-cost patients. However, despite improved patient outcomes, hospital profits decline under all discrimination scenarios due to intensified competition—a “Prisoner’s Dilemma” dynamic. Social welfare effects are ambiguous: while average quality improves, patient reallocation inefficiencies may offset these gains. The paper concludes that although patients generally benefit, policy must consider equity and system-level efficiency.