Money-Back Guarantee, Service Quality, and Productivity: The Marketing of In-Vitro Fertilization

Abstract

Marketing practices like Money-Back Guarantees (MBGs) and warranties are quite controversial in the health care market. Despite their professed intention to improve consumer welfare, MBGs are often decried for taking advantage of consumers who might not have the correct information. This concern is valid especially given the salient features of health care markets: a) customization, b) expert service, and c) difficulty in measuring service quality. For instance, in the context of in-vitro fertilization (IVF)-a medical procedure to assist infertile couples in having children-many health care and policy experts argue that MBGs offered by fertility clinics are nothing but marketing gimmicks and that these clinics either sort and treat only the more fertile patients or overtreat patients with more aggressive and risky treatment protocols. This concern, however, is in stark contrast with the signaling literature in marketing and economics. The central idea of the signaling theory is that the cost of offering MBGs can be so high that low-quality clinics are not able to afford mimicking the high-quality clinics' offering of MBGs. Essentially then, only high-quality clinics would be able to afford MBGs. Given these contrasting viewpoints, my dissertation aims to advance our understanding of the strategic MBG decisions in the health care market. Utilizing data from the U.S. IVF market, I investigate the relationship between MBGs and clinic capability, which contains two aspects: a) service quality, i.e., the effectiveness in transforming input to treatment outcome (or quality output), and b) service productivity, i.e., the efficiency in transforming input to production possibility (or quantity output). Considering the nature of the IVF market, my findings have natural extension to other health care and expert service markets. In chapter 2 (essay one), I empirically examine the underlying mechanism of MBGs-whether MBGs in the IVF market can act as credible signals of quality or simply marketing gimmicks-by investigating the relationship between MBG offers and treatment outcomes at the clinic level. The analysis is conducted on a large and unique longitudinal dataset that includes a) clinic-level treatment and outcome statistics for almost all IVF clinics in the U.S., b) fertility clinic characteristics and MBG decisions, c) information on state-level insurance mandates, and d) demographic characteristics. Using an instrument variable approach to account for the endogeneity of MBG decisions made by fertility clinics, I find that compared to clinics not offering MBGs, clinics offering MBGs secure better treatment outcomes (i.e., higher live birth rate) and use less aggressive treatment (i.e., transferring fewer embryos) without sorting higher fertility patients or imposing higher long-term risk (i.e., multiple birth rate). These results taken together suggest that MBGs can work as signals of quality despite the incentives for clinics to engage in opportunistic behaviors.In chapter 3 (essay two), I empirically examine the relationship between MBG decisions and clinic productivity. To quantify the unobserved productivity, I first incorporate the quantity-quality tradeoff into the production function and then estimate it using a non-parametric structural model approach recently developed in the economics literature. Empirically, to handle the endogeneity challenge caused by unobserved productivity, I use input change decision (i.e., hiring and investment) as a proxy for productivity. Then, I use an instrument variable approach to deal with the attenuation bias caused by measurement error in quality output. The results show that a) the quantity-quality tradeoff exists in the IVF market, b) expert labor plays a more important role than capital in determining the production quantity, and c) clinics with higher productivity are more likely to be offering MBGs, being non-profit, with longer experience, providing service to single woman, with higher competition, and in states with IVF insurance mandates. Compared to non-MBG clinics, MBG clinics have higher capability because they are not only more effective in transforming resource to successful outcome, but also more efficient in transforming capital and labor to production capacity. Shedding light on the public policy debate over MBG practice in the IVF industry, my study indicates that traditional marketing strategies deserve nuanced analysis in the health care and expert service markets.