Effects of Healthcare Reform on Market Structure and Competition Dynamics

Abstract

This thesis examines the effects of the introduction of choice and competition in primary care on the Finnish healthcare market. The purpose of the thesis is to evaluate how the implementation of the healthcare reform and consumers' freedom of choice are going to change the market structure and competition dynamics. The theoretical framework of the thesis consists of the opening of markets to regulated competition, the shift of production from public to private ownership, and government producer price-controlled markets. Finnish healthcare is being taken in a more cost-efficient direction which, at the same time, also increases the importance of private companies. The aim of the planned reform is to increase competition and to enhance services to meet the needs of the consumers both in terms of accessibility and consumer choice. The preparation for the reform has not been unproblematic since there is no single model that could simultaneously be optimal for consumers, companies, and the government. The regional differences of Finland will bring their own challenges to the management of the service network and for the opening of the market. Economic models do not provide simple and easy solutions that would guarantee an efficient outcome for all markets. Finland's geographically fragmented healthcare demand provides a challenge for setting up a comprehensive producer network, endangering the consumers' freedom of choice. According to the evidence from other Nordic countries, competition is focused on cities, often leaving sparsely populated areas for less attention. The opening of the healthcare sector to competition has been shown to increase the consumption of health services. In areas of low demand, markets are more concentrated and this has been shown to deteriorate the quality of service. In areas of high demand, e.g., cities, competition between producers is more intense. Due to competition, companies that are able to deliver the service most economically and efficiently persist in the market. The structure of the producer network is largely driven by the compensation scheme that provides the reimbursement for treatments provided. However, every compensation scheme has its own risks. In fixed compensation, there is the risk that producers will try to select the least expensive customers. The variable compensation system, which is linked to the service output level, on the other hand, encourages overproduction where production is inefficient and the producer market becomes costly for the government. Since regional differences in Finland are large, it is not optimal to use just one compensation system or a model. Inadequate production network and lack of competition are inevitably going to be problematic topics in Finland. Distances are long in sparsely populated areas but travelling times may also increase in larger cities. In addition to competition, market structures are influenced by how consumers are going to select their healthcare provider.