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Is healthy competition healthy? New evidence of the impact of hospital competition.
Inquiry 2002;39:45-55.
Gift TL, Arnould R, DeBrock.
Abstract
Competition among hospitals is commonly regarded as inefficient due to the
medical arms race phenomenon, but most evidence for this hypothesis predates
the Medicare prospective payment system and preferred provider legislation.
Recent studies indicate hospital competition reduces costs and prices, but
nearly all such research has focused on California. We add to the body of
literature that analyzes the effects of competition in hospital markets.
Using data from the state of Washington, we show that hospitals assume more
risk in competitive markets by being more likely to accept prospective payment
arrangements with insurers. If the arrangement is retrospective, the hospital
is more likely to offer a discount as the number of competing hospitals increases.
Both findings indicate that competitive forces operate the same in hospital
markets as in most others: as the number of competitors increases, prices
decrease and market power shifts from the suppliers to purchasers. The medical
arms race hypothesis that favors more concentrated hospital markets no longer
appears to be valid.