Competition and the performance of hospital markets

Abstract

This paper explores the relationship between competition and market performance for the primarily nonprofit industry, hospital services. A theoretical framework is adopted that assumes hospitals compete for physician affiliations on the basis of hospital price and resources provided. The model indicates that monopoly power leads to higher quality-adjusted hospital prices, resulting in a reduction in the level of hospital resources consumed. This reduction can occur through admissions, patient length of stay, or resources consumed per patient-day. A regression analysis reveals that all three are reduced as market concentration increases.