Consumer information, price, and nonprice competition among hospitals

The results of the empirical analysis in this paper indicate that broadly defined hospital quality declines in more concentrated markets. The direction of the effect of concentration on hospital charges is smaller and the direction is less clear. Prices are little, if any, lower in more concentrated markets. Hospital price-cost margins are higher in more concentrated markets. Higher concentration discourages price competition. The data do not support the increasing monopoly theory. Further, since hospital price-cost margins do not appear to remain constant, we must reject the redundant resources theory as well, though its stress on nonprice competition rings true. The empirical results are consistent with the traditional antitrust theory. In addition, consumer information plays a surprisingly important role. Consumer information is important in explaining hospital prices, and less important in hospital quality. Consumers are not passive; they do play a role in hospital choice. It is likely that more recent innovations in health insurance will increase consumer awareness. With an increase in consumer copayments, and more active insurer contracting, it is likely that future hospital competition is more likely to stress price, and future antitrust activity could lead to price reductions in addition to declining hospital price-cost margins.