Managed Care and the Hospital Market Concentration

Abstract

This paper examines the impact of managed care on the local hospital market structure. During the 1990s, managed care increased its presence rapidly in the healthcare market, and local hospital markets became more concentrated through closures and mergers. Despite the clear-cut observational correlation, the literature has not agreed on the causality. This paper analyzes the impact of managed care on two different dimensions of market concentration: the number of hospitals and the variation of the market shares of hospitals in each local market. This paper discovers that managed care reduces the number of hospitals, by driving relatively inefficient hospitals out of the market. However, it also reduces the variation of market shares, which counterbalances increased market concentration through a fall in the number of hospitals. Since market concentration indices map these two different dimensions of market concentration onto one dimension, the sum of those two conflicting effects makes managed care and market concentration indices seemingly unrelated. This explains the latest findings in the literature that the hospital market concentration and managed care market penetration have little correlation. Combined with existing findings in the literature, an excessive emphasis on the variation of market shares may lead to a failure of interpreting the market power of hospitals accurately.