This paper looks at the effects of market competition on production volume, costs and cost control by Dutch hospitals. At the start of 2005 the financing system of Dutch hospitals has been changed from a budget system to a non-regulated price competitive prospective reimbursement system. During the last five years the Dutch government gradually implemented this competitive system from about 10% of the health care products in 2005 up to 34% in 2009. In this segment, which mainly contains standard health care products, insurance companies and hospitals can freely negotiate about volume, price and quality of health care production. The gradual implementation of price competition is a ‘natural experiment’ that provides a unique opportunity to analyze the effects of market competition on hospital behavior.

We employ a difference-in-difference (DiD) strategy to estimate the causal effect of competition on production volume, costs and cost variation for a sample of outpatient care products. We find a negative effect of competition on production volume, no effects of competition on average costs, but we do find an effect on median costs. The latter effect is due to a shift from more expensive to less expensive DTCs. Consequently, there is no overall cost reduction for all DTCs but selective cost reductions for specific DTCs. Finally, contrary to our expectations, we find positive effects of competition on homogeneity of the care profiles of DTCs as measured by the Coefficient of Variation (CV) values. The CV values for DTCs in the market competition sample and in the budget sample decreased. This implies that reducing cost variation may be primarily related to a more reliable DTC registration and autonomous, systematic improvements in health care production.