Analysis of Two-Tier Healthcare Service Systems under Value-Based Competition in China

The Chinese tiered medical system falls far short in meeting the expectation that a patient visits a healthcare provider in community health services (CHS) institutions first, and, if necessary, gets the provider’s referral before seeing a specialist or going to a hospital. One of the most important reasons is the differential perceived value of patients on service quality. We model this issue as a two-tier service system and propose a solution to segment patients based on patient-perceived value for service quality. A mixed duopoly game is developed for analyzing the competition between CHS institutions and the hospitals, in which CHS institutions is to maximize its own total patients’ utilities, while the objective of the hospitals is to maximize its profit. Using game-theoretic analysis and queuing models to capture the operational performance of CHS institutions and the hospitals, we obtain the optimal strategies in equilibrium. This study generates managerial insights for practitioners to alleviate the burden of severe congestion in hospitals.