Intermediate Input Sharing in the Hospital Service Industry

Abstract

This paper addresses two related questions that help to explain geographic variation in access to medical services. The first question examines the existence of agglomeration economies in the hospital service industry. The second considers whether the sharing of intermediate inputs contributes to spillovers from spatial concentration of hospital services. These questions are addressed by estimating a bivariate probit model that explicitly controls for potential correlations between whether a service is provided and how the service is provided. Three key findings are obtained. First, hospitals in more concentrated areas are more likely to outsource intermediate services to specialized intermediate service suppliers. This suggests that agglomeration economies exist in the hospital service industry and are generated in part through the sharing of intermediate inputs. Second, the presence of nearby small hospitals increases the tendency to outsource, which is consistent with a “Chinitz” effect identified elsewhere in the literature. Third, the agglomeration effect attenuates geographically.