Untangling healthcare competition

Traditional approaches to competition may be inappropriate for healthcare providers. Neoclassical economics makes the implicit assumption that a single actor embodies consumption, compensation, and benefit from a transaction. In healthcare, this assumption does not hold. Instead, such actions are accomplished by three separate actors--consumers (physicians), customers (third-party payers), and clients (patients). A hospital simultaneously competes in three arenas. Hospitals compete for physicians along a technological dimension. Competition for third-party payers takes on a financial dimension. Hospitals compete for patients along a marketing dimension. Because of the complex marketplace interactions among hospital, patient, physician, and third-party payer, the role of price in controlling behavior is difficult to establish. The dynamics underlying the hospital selection decision--that is, the decision maker's expectations of services and the convenience of accessing services--must also be considered. Healthcare managers must understand the interrelationships involved in the three-pronged competitive perspective for several reasons. This perspective clarifies the multiple facets of competition a hospital faces. It also disentangles the actions previously fulfilled by the traditional single buyer. It illuminates the critical skills underlying the competition for each audience. Finally, it defines the primary criterion each audience uses in sorting among hospitals. Recognition of the multifaceted nature of competition among healthcare providers will help demystify market behavior and thereby improve internal organizational communication systems, managers' ability to focus on appropriate activities, and the hospital's ability to adapt to changing market conditions.