The Impact of Agglomeration Economies on Hospital Input Prices

Andrew Friedson,Jing Li

doi:10.2139/ssrn.2828546

Abstract

This paper examines the extent to which agglomeration of the hospital service industry enhances the productivity of producing health care. Specifically, we use a large set of private insurance claims from the FAIR Health database to show that an increasing spatial concentration of hospital services results in a decreased cost of obtaining intermediate medical services. We explicitly test whether the reduced cost at concentrated locations arises from the ability to share intermediate service providers. The identification relies on state variation in medical lab technician licensure requirements, which influence the cost of intermediate services only through the cost of running a lab. Our findings suggest that agglomeration of the hospital service industry attracts specialized medical labs, which in turn help to reduce the cost of producing laboratory tests.

Highlights

Health care resources are highly concentrated in the United States
The estimates in column (1) of both tables suggest that an increase in the scale of the hospital service industry decreases the price of medical laboratory tests
This study examines whether agglomerated hospital services are important in generating spillover effects, which reduces the cost of producing health care

Summary

Introduction

Health care resources are highly concentrated in the United States. As documented by the Dartmouth Atlas of Health Care, a large fraction of hospital beds are located in a small number of areas, including California, the Chicago area, the Northeast coastal area, and Florida. The tremendous concentration of health care capacity in a small number of locations has received much attention in recent years, especially with respect to whether health outcomes have been sufficiently improved in areas concentrated with a large amount of medical resources. In contrast, less attention has been paid to the potential cost savings that are likely generated by agglomeration and related spillover effects arising from spatial concentration of medical resources. As documented by the Dartmouth Atlas of Health Care, a large fraction of hospital beds are located in a small number of areas, including California, the Chicago area, the Northeast coastal area, and Florida.. The tremendous concentration of health care capacity in a small number of locations has received much attention in recent years, especially with respect to whether health outcomes have been sufficiently improved in areas concentrated with a large amount of medical resources.. Less attention has been paid to the potential cost savings that are likely generated by agglomeration and related spillover effects arising from spatial concentration of medical resources. This paper explores the extent to which local agglomeration of medical services fosters spillover effects that enhance the efficiency with which medical services are provided and which further leads to a reduced cost of producing health care. Understanding the impact of hospital concentrations on cost savings is valuable for both U.S health policy and

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Discussion

Conclusion