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Is hospital competition wasteful?
Insights
Local hospital competition may not be a "medical arms race." Instead, the extent of the market, not competition, primarily determines specialized services, highlighting significant economies of scale.
Area of Science:
- Health economics
- Healthcare management
- Market analysis
Background:
- The
Purpose of the Study:
- To develop and test a model predicting the supply of specialized hospital services in local markets.
- To evaluate the validity of the
Main Methods:
- Developed a theoretical model for specialized service provision.
- Analyzed data from California hospitals.
Main Results:
- Found minimal support for the
Conclusions:
- The extent of the market is a crucial factor in determining specialized service supply.
- Overestimating competition's role arises from improperly defining market scope.
Abstract:
Recent attention has been given to the hypothesis that local hospital competition takes the form of costly duplication of specialized services--the "medical arms race." This contrasts with the hypothesis that the supply of specialized services is determined solely by "the extent of the market." We develop a model predicting the provision of specialized services in local markets. Our analysis of California hospitals provides minimal support for the medical arms race hypothesis while suggesting substantial scale economies for many services. Our results emphasize the importance of properly specifying the extent of the market. Failure to do so leads one to overestimate the importance of competition.