Patient selection or rational patient choice? Insights from a hospital competition model with heterogeneous agents

Hospitals differ along several dimensions, including ownership structure, strategic objectives, and resource capacity, while patients vary in illness severity, comorbidities, and other factors affecting their healthcare needs. Available empirical evidence of patient selection by hospitals, however, is rather limited. In this paper, we develop a theoretical model of quality competition under regulated prices that incorporates provider heterogeneity-such as distinctions between public and private hospitals-and patient heterogeneity in terms of illness severity. In our framework, hospitals are not allowed to track patients at the admission and face capacity constraints which induces congestion costs to patients. We show that, even in the absence of explicit patient screening, differences in hospital case mix can arise endogenously through rational patient choice. Moreover, the extent of this case mix differentiation increases with the degree of heterogeneity among agents in the market. Our findings suggest that observed disparities in patient composition across hospitals do not, in themselves, constitute evidence of opportunistic selection. Rather, they may reflect equilibrium outcomes driven by quality differences, capacity constraints, and heterogeneous patient preferences.