Many plans attempt to influence and improve the HEDIS measures by using techniques such as provider and patient education, clinical guideline adoption, case and disease management, pay-for-performance and incentive programs, and decision support and electronic information systems (Scanlon et al. 2001
). Likewise, plans can influence CAHPS measures by making investments in plan service that are visible to members.
The theoretical relationship between competition and quality is complex, in part because quality is only one of several endogenous variables, such as premiums and benefits packages, that plans choose when competing for enrollees. Gaynor (2006)
discusses the relationship between competition and quality, and concludes that when premiums are regulated, as they are in many public sector programs, competition should be positively related to quality because firms will use quality to compete for enrollees. The magnitude of the effect of competition on quality depends on the quality elasticity of demand. When prices are not regulated, however, like in the commercial insurance market, economic theory is ambiguous about how competition and quality are related. Plans may attract enrollees with higher quality, better benefits, or lower premiums, with the total effect of each being a function of the relative price, benefit, and quality elasticities of demand (Gaynor 2006
There may even be differential effects of competition on the HEDIS and CAHPS measures, and even differences among the HEDIS indicators, if elasticities for those different aspects of performance vary. For example, to the extent that competition drives plans to respond to consumer preferences, CAHPS measures might be more responsive to competition because these measures capture aspects of quality that are more salient to health plan members, while the HEDIS measures reflect what experts think is good quality of care, but may not be highly correlated with what consumers think about plan quality.
In the health insurance sector, there are several additional considerations. First, the role employers play in selecting the menu of plan options and their prices to employees may influence elasticities. The relevant elasticities combine both employee and employer preferences, depending on the extent to which employers act as agents for employees. Similarly, insurers may serve both public and commercial markets, and production processes may impede providing a different quality to each sector, resulting in plans' decisions being driven by their overall purchaser mix.
Second, improvements in quality may lead to lower costs in the future, although there is no solid evidence on this point (McLaughlin and Ginsburg 1998
; Leatherman et al. 2003
). Profit-maximizing firms should seek to exploit these efficiencies, regardless of competition; however, competition may affect the extent to which they do so because it may be associated with greater plan switching, thereby diminishing the ability of plans to capture these savings.
Third, competition among insurers may be associated with physicians serving fewer patients from any one insurer. This reduces the incentive plans have to undertake quality improvement initiatives because their efforts may spill over to patients from other plans (Beaulieu 2002
) and may increase the costs associated with quality improvement initiatives if physicians are less responsive to messages from plans that cover fewer of their patients.
In this paper we do not identify the structural parameters that determine the relationship between competition and plan quality, but instead focus on the reduced form relationship. This is analogous to the literature examining the relationship between competition and premiums, which also focuses on reduced form relationships. Our analyses examine the important policy question concerning competition and quality, addressing the assertion that, despite the ambiguity of theory, competition will improve quality (while lowering premiums).