Hospital competition, cost, and medical practice

The hospital market in the United States has always been competitive, but the nature of that competition has changed in the last few years. In the past, when most patients had third party coverage which reimbursed hospitals for incurred costs, competition focused on quality and services as hospitals sought to attract physicians and their patients. This competition led to duplication of services and facilities in a "medical arms race" which resulted in higher, rather than lower, costs in areas with many hospitals. Hospitals with many neighbors even had longer lengths of stay for patients undergoing specific surgical procedures. Now, with Medicare's Prospective Payment System offering fixed payments for patients with a given diagnosis, there are strong pressures for cost containment. These pressures will have their greatest impact in areas with the most hospitals, especially when health maintenance organizations and preferred provider organizations contract selectively with some hospitals. Hospitals, in turn, will be less responsive to cost-increasing requests by their medical staffs.