The willingness of individuals to engage in a harmful act may be influenced by direct personal experiences and the experiences of others, which can inform individuals about the likely consequences of their actions. In this paper, we examine how obstetricians respond to litigation. It is contended that obstetricians respond to increases in litigiousness by performing more caesarian sections. Using micro data, we examine whether physicians perform more caesarians after they or their colleagues have been contacted about a lawsuit. We observe very small, short-lived increases in caesarian section rates. It does not appear that the recent sharp rise in caesarian section rates is in direct response to litigation. We present indirect evidence that the increase may instead represent a change in consumer tastes.

Context:  In recent years, federal courts have facilitated hospital consolidations and other potentially anticompetitive actions by accepting hospital claims that they compete in expansive geographic markets.   Recent events, including two Federal Trade Commission actions, suggest that a sea change in antitrust is ongoing, thanks in part to the development of new methods for defining geographic markets.  In this paper we review the recent history of hospital antitrust and describe the evolving methods used to define markets.  We illustrate the new methods by considering two consolidations recently proposed by a New York regulatory agency. 

Methods: The new methods for defining geographic markets rely on estimates from conditional choice models using patient-level hospitalization data.   These estimates are the raw material for computations of price effects derived from a theoretical model of hospital pricing in a managed care environment.

Findings: Applying these methods to two proposed consolidations in New York, we find that one of the mergers would likely raise prices by a substantial amount without the promise of offsetting efficiencies.   

Conclusions: New methods for geographic market definition fundamentally alter how courts will evaluate antitrust challenges.  Although additional research is necessary to refine the predictions of tehse new methods, consolidating hospitals, as well as any other hospitals engaging in potentially anticompetitive conduct, can no longer rely on a friendly reception in the courtroom.

This paper investigates whether management teams that fail to exploit regulatory loopholes are vulnerable to replacement. We use the U.S. hospital industry in 1985-1996 as a case study. A 1988 change in Medicare rules widened a pre-existing loophole in the Medicare payment system, presenting hospitals with an opportunity to increase operating margins by five or more percentage points simply by “upcoding” patients to more lucrative codes. We find that “room to upcode” is a statistically and economically significant predictor of whether a hospital replaces its management with a new team of for-profit managers. We also find evidence that hospitals replacing their management subsequently upcode more than a sample of similar hospitals that did not.

Over the past decade, public and private-sector entities have invested considerable funds

in gathering and disseminating healthcare report cards. However, there is insufficient

evidence that these report cards contribute additional information that was not inferred by

consumers prior to their release. Using panel data on Medicare HMO market shares

between 1994 and 2002, we examine the relationship between enrollment and quality

both before and after report cards were mailed to 39 million Medicare beneficiaries in

1999 and 2000. We find that high-quality plans enjoyed steady enrollment gains

throughout the sample period, suggesting that enrollees were learning about quality from

other sources prior to the government intervention. The report cards further boosted

enrollments for plans with high ratings for consumer satisfaction, drawing enrollees away

from lower-rated plans as well as traditional Medicare. On the supply side, we find no

evidence that the report cards stimulated quality improvements by the HMOs.

other sources prior to the government intervention. The report cards further boosted

enrollments for plans with high ratings for consumer satisfaction, drawing enrollees away

from lower-rated plans as well as traditional Medicare. On the supply side, we find no

evidence that the report cards stimulated quality improvements by the HMOs.

the sample period, suggesting that enrollees were learning about quality from

other sources prior to the government intervention. The report cards further boosted

enrollments for plans with high ratings for consumer satisfaction, drawing enrollees away

from lower-rated plans as well as traditional Medicare. On the supply side, we find no

evidence that the report cards stimulated quality improvements by the HMOs.

Prior studies find that the growth of managed care through the early 1990s introduced a strong positive relationship between price and concentration in hospital markets. We hypothesize that the relaxation of constraints on consumer choice in response to a “managed care backlash” has diminished the price sensitivity of demand facing hospitals, reducing or possibly reversing the price concentration relationship. We test this hypothesis by studying the price/concentration relationship for hospitals in California and Florida for selected years between 1990 and 2001, while addressing the potential endogeneity of concentration. We find an increasingly positive price/concentration relationship through 1999. Between 1999 and 2001, the relationship weakens and possibly reverses.

Research on the effects of publicly reported hospital quality report cards on patient market shares is mixed. Higher ranking hospitals do not consistently experience increases in market share. We argue that this may be because the report cards do not always convey “news” about quality; in some cases the rankings conform with prior beliefs about quality. We develop a structural model of the “news” in report cards and estimate the model using data from New York State in 1989-1991. We show hospitals with positive news in the original 1990 report cards experienced a gain in market share, but that a misspecified model might continue to find no report card effect.

In the past fifteen years, there have been numerous instances in which a tertiary care hospital acquires a nearby community hospital. One possible motive is to increase referrals from the target’s market area. The acquirer might even try to alter the types of patients it admits from the target’s market, concentrating on more profitable referrals. We test these hypotheses by comparing changes in referrals of patients from the target market area to changes in a matched set of control markets, using data on 26 acquisitions in Florida and New York. The results vary substantially across acquisitions, with no significant change in admissions being the most common outcome. Nevertheless, 25% of the acquisitions were followed by a significant increase in CABG and PTCA referrals to the acquirer, and 44% lead to increases in referrals of patients from a broader set of tertiary DRGs. In contrast, only one acquisition reduced CABG and PTCA referrals, while two lowered overall tertiary referrals. We also find weak evidence that some acquirers engage in cherry-picking, increasing admissions of low-severity patients from the target market, post-acquisition. Yet a number of acquirers also increased referrals of the most severely ill patients, possibly due to outlier and stop loss payments, or perhaps a reflection of physiciansEpreferences for more complex cases. On balance, our results are consistent with recent studies (Burns and Pauly, 2002; Conrad, 2004) indicating that vertical acquisitions that lead to enhanced performance are more commonly the exception than the rule.

Himmelstein, Warren, Thorne and Woolhandler recently contended that medical problems contribute to 54.5 percent of personal bankruptcies and threaten the solvency of solidly middle class Americans. They propose comprehensive national health insurance (NHI) as a solution. A re-examination of their data suggests that medical bills are a contributing factor in just 17 percent of personal bankruptcies and that those affected tend to have incomes closer to poverty level than to middle class. Moreover, for NHI to have an impact it would have to define “medical” expenses in a much broader way than is now typical of either private or government-funded plans.

The 1990s saw considerable integration of hospitals and physician practices, as well as some dissolution of integrated entitites. Using data from California, we investigate whether such vertically integration activity affected prices charged to managed care payers. We find that hospitals that form highly integrated structures generally reduced prices. Hospitals did not change prices upon dissolution, however. The only possible evidence of price increases occurred among the four rural hospitals in our sample. Overall, our findings are inconsistent with established economic explanations for vertical integration, and are also inconsistent with the empirical work of Cuellar and Gertler [2002], who find systematic evidence that hospitals increased their prices after vertically integrating with physicians.

There is much debate on how recent increases in medical malpractice premiums affect patientsEaccess to care. We examine activity levels of neurosurgeons and obstetricians, as well as patient incidence and travel times in the state of Florida, where malpractice insurance premiums have soared since 2000. Compared to 1997-2000 trends, we find that during 2000-2003 many neurosurgeons cut back their volumes of brain surgeries and craniotomy patients traveled longer for care without any significant change in the overall incidence of craniotomies. Women undergoing high risk deliveries did not see increases in travel times.

During the past decade, hospitals have consolidated at an unprecedented rate. Fearing a rise in market power, U.S. antitrust agencies have attempted to block several consolidations, with little success. In ongoing hearings, these agencies are reexamining the potential anticompetitive impact of consolidation. This paper presents new evidence about the effects of consolidation on hospital prices. We examine the actual prices paid to hospitals in four market areas across the United States, with mixed results. The majority of merging hospitals raised prices by more than their peers, but many did not. Moreover, we find a statistically significant association between price increases and consolidation in only two markets. Our results suggest that some, but not all mergers of competing hospitals may facilitate price increases.

Through utilization review (UR), managed care organizations (MCOs) monitor and alter physician treatment decisions. We show that the value of UR depends on physician incentives. Not surprisingly, when physicians have incentives to significantly overtreat patients, UR can improve social welfare by eliminating unnecessary utilization. More surprisingly, UR can also improve welfare when physicians have incentives to significantly undertreat patients. In this case, UR filters out the least valuable cases, encouraging physicians to recommend more treatments. We also show that the effectiveness of UR depends on MCO precommitment to a treatment approval threshold. Ex ante optimal precommitment can make it appear that the MCO is inappropriately withholding care ex post.

We call markets in which intermediaries sell networks of suppliers to consumers who are uncertain about their needs "option demand markets". In these markets, suppliers may grant the intermediaries discounts in order to be admitted to their networks. We derive a measure of each supplier’s market power within the network; the measure is based on the additional ex ante expected utility consumers obtain from the supplier’s inclusion. We empirically validate the WTP measure by considering managed care purchases of hospital services in the San Diego market. Finally, we present three applications, including an analysis of hospital mergers in San Diego.

Objective.To identify economic and organizational characteristics that affect the likelihood that health maintenance organizations (HMOs) include new drugs on their formularies. Data Sources.We administered an original survey to directors of pharmacy at 75 HMOs, of which 41 returned usable responses. We obtained drug-specific data from an industry trade journal. Study Design.We performed multivariate logistic regression analysis, adjusting for fixed-drug effects and random-HMO effects. We used factor analysis to limit the number of predictors. Data Collection Methods.We held initial focus groups to help with survey design. We administered the survey in two waves. We asked respondents to report on seven popular new drugs, and to describe a variety of HMO organizational characteristics. Principal Findings.Several HMO organizational characteristics, including nonprofit status, the incentives facing the director of the pharmacy, size and make-up of the pharmacy and therapeutics committee, and relationships with drugs makers, all affect formulary adoption. Conclusions.There are many organizational factors that may cause HMOs to make different formulary adoption decisions for certain prescription drugs.

This paper examines the effect of differentiation among Health Maintenance Organizations (HMOs) on local market competition. Most markets for HMOs appear to be sufficiently unconcentrated when considered in aggregate; however, differences among HMOs may allow for higher margins than one would expect given the number of competitors. To investigate this possibility, we divide HMOs into those that serve only the local area, and those that serve a larger regional or national area. We then analyze the extent to which one type of HMO affects the local market structure of the other using an equilibrium model of entry and product choice. We find that the two types of HMOs have strong competitive effects within segments, but that the competitive effect of differentiated firms is negligible.

We investigate whether two-to-one hospital mergers lead to short-term cost savings. We use a unified empirical methodology, so that we may directly compare results for systems (where hospitals share ownership but maintain separate licenses) and mergers (where hospitals share the same license). Our comparison group consists of a group of ten 'pseudo mergers' that were chosen using nearest neighbor matching based on a propensity score. Estimates of a multi-product cost function reveal that hospitals that form systems do not enjoy any measurable cost reductions. On the other hand, mergers that lead to closure (or conversion) of one of the inpatient facilities offer considerable savings two, three and four years out- our point estimates range from 6-9 percent. Mergers that do not lead to closures appear to decrease costs in the first-year, by an estimated 5 percent. However, after three or four years, there is no longer a significant reduction in costs. The results are robust to changes in the specification and the sample. We also present some evidence that the distance between merger partners is inversely related to cost savings.

Health care report cards may address important information asymmetries in markets for health care, but they may also give doctors and hospitals incentives to decline to treat more difficult, severely ill patients. Whether report cards are good for patients and for society depends on whether financial and health benefits outweigh their costs in terms of the quantity, quality, and appropriateness of medical treatment that they induce. Using national data on Medicare patients at risk fo cardiac surgery, we find that cardiac surgery report cards in New York and Pennsylvania led both to selection behavior by providres and to improved matching of patients with hospitals. On net, this led to higher levels of resource use and to worse health outcomes, particularly for sicker patients.

In this paper, we empirically test for network effects and preannouncement effects in the DVD market. We do this by measuring the effect of potential (incompatible) competition on a network undergoing growth. We find that there are network effects. We also find that the preannouncement of DIVX temporarily slowed down the adoption of DVD technology.

We find that higher levels of local managed care penetration are associated with substantial increases in consolidation in hospital and physician markets.

This paper provides an empirical investigation of how firms with cost advantages (cost disadvantages) exploit (cope with) their advantages (disadvantages) through their pricing behavior. Guided by microeconomic theory and insights from the industrial organization literature, we develop testable implications about the effect of industry structure and firm-specific characteristics on the pass-through elasticity: The rate at which changes in a firm's cost relative to competitors translates into changes in the firm's price relative to competitors. We test these implications using data from the PIMS Competitive Strategy database. The results indicate that a firm's pass-through elasticity systematically depends on whether the firm operates in a commodity or noncommodity industry, the firm's capacity utilization, and its cost and quality position in its industry. The pass-through elasticity is also shown to depend in a nonlinear way on market concentration.

Objectives. To assess the impact of total quality management (TQM) and organizational culture on a comprehensive set of endpoints of care for coronary artery bypass graft surgery (CABG) patients, including risk-adjusted adverse outcomes, clinical efficiency, patient satisfaction, functional health status, and cost of care. Methods. Prospective cohort study of 3,045 eligible CABG patients from 16 hospitals using risk-adjusted clinical outcomes, functional health status, patient satisfaction, and cost measures. Implementation of TQM was measured by a previously validated instrument based on the Baldridge national quality award criteria. Organizational culture was measured by a previously validated 20-item instrument. Generalized estimating equations were used to control for potential selection bias, repeated measures, and intraclass correlation. Results. A 2- to 4-fold difference in all major clinical CABG care endpoints was observed among the 16 hospitals, but little of this variation was associated with TQM or organizational culture. Patients receiving CABG from hospitals with high TQM scores were more satisfied with their nursing care (P = 0.005) but were more likely to have lengths of stay 10 days (P = 0.0003). A supportive group culture was associated with shorter postoperative intubation times (P = 0.01) but longer operating room times (P = 0.004). A supportive group culture was also associated with higher patient physical (P = 0.005) and mental (P = 0.01) functional health status scores 6 months after CABG. Conclusions. There was little effect of TQM and organizational culture on multiple endpoints of care for CABG patients. There is a need to examine further the relationships among individual professional skills and motivations, group and microsystem team processes, specifically tailored interventions, and organization-wide culture, decision support processes, and incentives. Assessing the impact of such multifaceted approaches is an important area for further research.

A recent paper by Lynk challenges the conventional application of antitrust laws to mergers of nonprofit hospitals. Examining 1989 data from California, he concludes that nonprofit hospital mergers will lead to lower prices. We believe that Lynk's methods may generate biased estimates. When we correct for some of the possible biases, we are unable to support Lynk's findings.

Background. Virtually all hospitals in the United States report that they engage in efforts to improve quality, such as continuous quality improvement (CQI). Little is known about the costs of these efforts and whether they are associated with improved outcomes or lower patient-care costs. Objectives. The principal objective of this study was to provide benchmark data on the costs of efforts to improve quality. The authors also attempted to determine if quality improvement expenditures are correlated with outcomes and/or condition-specific hospital costs. Methods. Detailed information on the cost of quality improvement was obtained from hospitals participating in a broad study of CQI activities. These data were correlated with patient outcomes and condition-specific costs. The subjects were medium to large hospitals throughout the United States. Senior managers provided budgetary information on direct costs of quality improvement, and details about meetings associated with quality improvement. They also provided summary medical bills for all patients undergoing total hip replacement and coronary artery bypass graft surgery. The billing information was combined with data provided by the Health Care Finance Administration to estimate condition-specific costs. Patients were directly surveyed to obtain information about satisfaction and outcomes. Results. There is a wide range of expenditures on quality improvement activities. Meeting costs are a substantial percentage of total costs. Neither total costs nor meeting costs are correlated with condition-specific costs. Discussion. Hospital managers can be expected to insist on evidence that quality improvement expenditures produce tangible benefits. This article provides benchmark estimates of those benefits and a methodology for further research.

This paper offers a framework and methodology for resolving the question regarding the existence of strategic groups. We say that a strategic group exists if characteristics of the group affect firm performance independently of firm-level and industry-level effects. We argue that group-level effects are a byproduct of strategic interactions among members, and develop an empirical testing model, based on the New Economics of Industrial Organization, to distinguish true group effects from spurious effects. From this model, we derive a series of logically consistent propositions, suggesting that while strategic interactions are critical for a group-level effect on profits, mobility barriers are necessary to preserve both groups and their effects over time. A review of prior empirical studies of strategic groups suggests that the inconclusive nature of prior research has been due more to the lack of a theoretical foundation for empirical analysis than to the nonexistence of groups. To the extent that our methods have been employed, there is limited evidence that a rigorous search for strategic groups may prove fruitful.

This paper presents new estimates of scale economies for US hospitals. We show that the common translog specification of hospital costs is a misspecification, and employ nonparametric, local linear estimation with both continuous and discrete covariates. A bootstrap method is used to provide inferences regarding ray scale economies and expansion path scale economies for a large sample of hospitals covering 1984-1996. We find evidence of changes in the structure of hospital costs over the sample period, as well as evidence of locally optimal hospital sizes.

Managed care has shifted purchasing decisions from patients towards payers. While this shift has been associated with increased price competition in provider markets, we believe that it may enhance the potential for consumer injury from mergers in geographic markets previously considered immune to antitrust concerns (e.g. suburban components of large metropolitan areas). In addition, recent changes also increase concerns about mergers in product submarkets such as tertiary care.

Over US$20 billion is spent annually on medical research and development in the United States alone. Although good data are lacking, it is probable that only a tiny percentage goes to R&D about preventive goods and services ('prevention R&D'). In this paper, I hypothesize that this allocation of R&D dollars is inappropriate. Market incentives, combined with regulatory barriers associated with the Food and Drug Administration's 'do no harm' philosophy, make it plausible to conclude that we currently underfund prevention R&D. I find some support for this conclusion in an analysis of current funding of research about vitamin E.

Objective. To examine how private hospitals dependent on Medicaid for a large proportion of their revenues have fared in the face of substantial Medicaid (and more modest Medicare) reimbursement cutbacks and growing managed care. We specifically test three hypotheses regarding Medicaid-dependent hospitals: (1) that they are more likely to "cost-shift" cutbacks to private patients; (2) that they are more likely to cut services for Medicaid (and other) patients; and (3) that they are more likely to close. Data/Study Setting. Private short-term hospitals in California, a state that has experienced a rapid growth in managed care since the early 1980s. Data are drawn from the California Office of Statewide Health Planning and Development (OSHPD) Hospital Disclosure Files for fiscal years 1983 and 1992. Study Design. We compare changes in net prices and the provision of services, proxied by list price-adjusted charges, at hospitals for Medicaid, Medicare, and privately insured patients between fiscal years 1983 and 1992 controlling for hospital and market characteristics, case mix, and the proportion of revenues from Medicaid patients. We also examine the probability that a hospital closed during the study period as a function of hospital and market characteristics and payer mix. Although the growth of managed care is hypothesized to reduce opportunities for "cost shifting," it may also confound our analysis of price changes if Medicaid-dependent hospitals are unattractive to managed care patients and respond by offering lower prices to plans. Principal Findings. We find no evidence that Medicaid-dependent hospitals raised prices to private patients in response to Medicaid (or Medicare) cutbacks; ff anything, they lowered them. However, we find that service levels fell for Medicaid (and Medicare) patients relative to those for privately insured patients and that reductions were greater at Medicaid-dependent hospitals. In addition, our findings suggest that service levels also fell for private patients at Medicaid-dependent hospitals, although reductions were smaller for these patients, suggesting that quality may be a public good at hospitals. Finally, Medicaid-dependent hospitals were more likely to close. Conclusions. It been suggested that private hospitals may respond to public reimbursement cutbacks by simply "shifting" costs to privately insured patients, limiting overall cost savings but insulating public patients and hospitals from the effects of cutbacks. We find no evidence of cost shifting. Rather, our results suggest that patients and hospitals bore the brunt of cutbacks; service levels fell at Medicaid-dependent hospitals and such hospitals were more likely to go out of business. This suggests that the consequences of proposed Medicare and Medicaid cutbacks could be severe for public patients and the hospitals that care for them.

This paper examines factors associated with differences in managed care penetration across geographic areas. Two alternative measures of managed care penetration are considered: the percentage of revenue physicians received from managed care contracts and market survey data on enrollments in managed care plans. Results are similar for both types of measures. Our analysis suggests that demographics, labor market characteristics and supply side variables including the level of concentration in hospital markets, hospital occupancy rates and the practice organization patterns of physicians are all important determinants of managed care penetration.

Objective. To determine the effects of managed care growth on the incomes of primary care and specialist physicians. Data Sources. Data on physician income and managed care penetration from the American Medical Association, Socioeconomic Monitoring System (SMS) Surveys for 1985 and 1993. We use secondary data from the Area Resource File and U.S. Census publications to construct geographical socioeconomic control variables, and we examine data from the National Residency Matching Program. Study Design. Two-stage least squares regressions are estimated to determine the effect of local managed care penetration on specialty-specific physician incomes, while controlling for factors associated with local variation in supply and demand and accounting for the potential endogeneity of managed care penetration. Data Collection. The SMS survey is an annual telephone survey conducted by the American Medical Association of approximately one percent of nonfederal, post-residency U.S. physicians. Response rates average 60-70 percent, and analysis is weighted to account for nonresponse bias. Principal Findings. The incomes of primary care physicians rose most rapidly in states with higher managed care growth, while the income growth of hospital-based specialists was negatively associated with managed care growth. Incomes of medical subspecialists were not significantly affected by managed care growth over this period. These findings are consistent with trends in postgraduate training choices of new physicians. Conclusions. Evidence is consistent with a relative increase in the demand for primary care physicians and a decline in the demand for some specialists under managed care. Market adjustments have important implications for health policy and physician workforce planning.

OBJECTIVE: To examine the impact of managed care on the employment and compensation of primary care and specialty physicians, as measured by changes in income, physician-to-population ratios, and specialty choices. METHODS: The authors used data from the American Medical Association's Socioeconomic Monitoring System survey, a nationally representative 1% random survey of post-residency patient-care physicians, and location data from the AMA Masterfile to evaluate the relationship between the growth in managed care from 1985 to 1993 and (a) inflation-adjusted physician incomes and (b) physician-to-population ratios for primary care physicians and specialists. They also used data from the National Residency Matching Program for 1989 through 1995 to look at trends in available positions and specialty choices. RESULTS: Primary care incomes grew 4.78% annually ($33,526 cumulatively) in states with the highest managed care growth, compared to 1.20% ($7448 cumulatively) in the lowest quartile of managed care growth. The difference in income growth for medical and surgical subspecialists between the highest and lowest quartiles was not statistically significant. The incomes of radiologists, anesthesiologists, and pathologists (RAPs) rose 0.14%, or $1700, in the highest quartile versus 4.14% ($58,558) in the lowest. Subspecialists per capita did not differ by quartile of managed care growth; but RAPs per capita increased fastest in states in the lowest quartile. Between 1989 and 1995, the number of family practice and pediatric residency positions that were filled rose 32%, while the number filled remained stable for medical and surgical subspecialists and the number of RAP positions filled fell 14%. CONCLUSIONS: The growth in managed care has been associated with significant changes in physician incomes and practice locations. Between 1985 and 1993, states with the fastest growth in managed care penetration saw the highest rate of growth in primary care physicians' income and the slowest rate of growth in RAP physicians' income. At the same time, the number of RAP physicians grew most rapidly in those states with the lowest rate of managed care growth. Finally, between 1989 and 1995, there was a dramatic increase in the number of primary care residency positions filled and a marked decrease in the number of RAP residency positions filled across the country.

This paper discusses the supplier power of medical specialists. We argue that a combination of factors, including the structure of health care delivery, reimbursement systems, the presence of option demand, and high consumer switching costs, create circumstances in which medical specialists may be able to exercise significant seller power. We explore the implications of this for the pricing and organization of medical care. Copyright 1996 The Massachusetts Institute of Technology.

Estimates of the surplus loss due to physician practice variation measure the area under the 'shifted' demand curve. This method is valid only if the unshifted demand curve is derived from the distribution of true (ex post) values of care. If the unshifted demand curve does not reflect the true value of care, then the traditional methods of measuring surplus loss can be seriously biased.

This paper examines two motives for the formation of local multihospital systems: cost reduction and reputation enhancement. Systems may reduce costs by eliminating redundancies and reducing administrative costs. Integration may also lower costs for consumers seeking consistently high qualiiy. We hypothesize that if systems achieve either cost or reputation benefits, then member hospitals will look different from random collections of hospitals. We find that local systems do not appear to have lower costs but do appear to enjoy reputation benefits over nonsystem hospitals. Our findings challenge the assumptions behind popular health reform initiatives.

This paper examines the relationship between basic and applied pharmaceutical research. We focus on three stages of research and development (R & D): government-funded basic research; publication in medical journals; and industry-finded applied R&D. We estimate that a one percent increase in basic research in a particular therapeutic category causes a 0.76 percent increase in industry R&D in that category, and a 1.71 percent increase in other categories, mer seven years. We also find that research incentives differ across government, academic and industry researchers. For example, government funding favors diseases that are less prevalent and more debilitating than industry funding.

Since the Food and Drug Administration (FDA) Amendments of 1962, the average time from a drug's first worldwide patent application to its approval by the FDA has risen from 3.5 to 13.5 years. FDA policies and manufacturers' incentives suggest that more important drugs may have reached the market sooner. To test this, we develop measures of "time to approval" and "importance," and determine how the latter affects the former. Our results indicate that more important drugs are developed and approved more rapidly than less important drugs. These results imply that the costs of approval lags have probably been overstated and challenge estimates of the returns to research and development in the pharmaceutical industry.

A controversial technique for testing the hypothesis that physicians induce demand involves two stage least squares (TSLS) regression analysis of cross-section data on physician supply and utilization. This paper tests the power of TSLS by applying it where there is at most only a trivial amount of demand inducement--the demand for childbirths. We find 'evidence' of inducement of childbirths, calling into question the validity of the TSLS approach. This unlikely finding may be traced to at least two factors: The first stage regression is not identified and the second stage regression does not adequately address border crossing.

Payer-driven competition has been widely advocated as a means of increasing efficiency in health care markets. The 1990s reforms to the UK health service followed this path. We examine whether competition led to better outcomes for patients, as measured by death rates after treatment following heart attacks. We exploit differences in competition over time and space to identify the impact of competition. Using data on mortality as a measure of hospital quality and exploiting the policy change during the 1990s, we find that the relationship between competition and quality of care appears to be negative.

Immediately prior to the passage of the 1962 Food and Drug Administration Amendments, there were a number of drugs recalled from markets worldwide. Announcements about the dangerous side effects of these drugs were associated with lower-share prices for their manufacturers and the industry as a whole. We perform several analyses to sort out alternative explanations for the observed declines. We find that dangerous drug announcements had no effect on the sales of other drugs and didn't affect the share values of European drug makers doing little business in the U.S. We also find that share-price reductions associated with recalls in the 1970s and 1980s were confined to the manufacturers of the recalled drugs. These patterns are consistent with the hypothesis that drug company shareholders viewed the recalls in the early 1960s as signals of an increase in the cost of compliance with new (and more stringent) drug-testing requirements. Copyright 1994 by the University of Chicago.

There has been considerable consolidation in the hospital industry in recent years. Over 900 deals occurred from 1994-2000, and many local markets, even in large urban areas, have been reduced to monopolies, duopolies or triopolies. This surge in consolidation has led to concern about its effect on competition in local markets for hospital services. In this paper we examine the impact of market structure on competition in local hospital markets – specifically, does competition increase with the number of firms? We extend the entry model developed by Bresnahan and Reiss to make use of quantity information and apply it to data on the US hospital industry. The results from the estimation are striking. In the hospital markets we examine, entry leads to markets quickly becoming competitive. Entry reduces variable profits and increases quality. Indeed, most of the effects of entry come from having a second and possibly a third firm enter the market. The use of quantity information allows us to infer that entry is welfare increasing.

This study examines evidence of market segmentation on the basis of patients' insurance status, demographic characteristics, and medical condition in selected local markets in California in the years 1983 and 1989. Substantial differences exist in the probability patients may be admitted to particular hospitals based on insurance coverage, particularly Medicaid, and race. Segmentation based on insurance and race is related to hospital characteristics, but not the characteristics of the hospital's community. Medicaid patients are more likely to go to hospitals with lower costs and fewer service offerings. Privately insured patients go to hospitals offering more services, although cost concerns are increasing. Hispanic patients also go to low-cost hospitals, ceteris paribus. Results indicate little evidence of segmentation based on medical condition in either 1983 or 1989, suggesting that "centers of excellence" have yet to play an important role in patient choice of hospital. The authors found that distance matters, and that patients prefer nearby hospitals, moreso for some medical conditions than others, in ways consistent with economic theories of consumer choice.

Recent attention has been given to the hypothesis that local hospital competition takes the form of costly duplication of specialized services -- the "medical arms race." This contrasts with the hypothesis that the supply of specialized services is determined solely by "the extent of the market." We develop a model predicting the provision of specialized services in local markets. Our analysis of California hospitals provides minimal support for the medical arms race hypothesis while suggesting substantial scale economies for many services. Our results emphasize the importance of properly specifying the extent of the market. Failure to do so leads one to overestimate the importance of competition.

The hospital services component of the Consumer Price Index (CPI) measures the cost of hospital services to private patients paying list prices. It is, however, widely used as an estimate of the overall rate of inflation in hospital prices in spite of the fact that there are strong reasons to believe that it is inappropriate to use the CPI for this purpose. This is because: 1) A growing number of patients are enrolled in health maintenance organizations (HMOs) and preferred provider organizations (PPOs), which negotiate discounts from list prices; and 2) the size of the discounts may have been increasing. The potential result is a gap between the rate of inflation of list prices and the rate of inflation of actual prices paid in transactions. This study explores whether such a gap exists and determines its possible magnitude. In addition, parallel indices for list and actual prices are computed on the basis of data from California hospitals for fiscal years 1983-1988. The analysis suggests that list price inflation has greatly exceeded actual inflation-by a factor of two for recent years. These findings have broad implications for evaluating not only inflation but also the impact of cost containment strategies.

This article analyses patient mobility across Italian regions. A modified gravity model of patient migration is specified and estimated using panel observations covering mobility and other main regional quality indicators over the period 1994-1997. Despite the high level of aggregation due to data constraints, the empirical findings show that in Italy there is wide scope for quality-driven mobility while income determines the quality of the service offered.

This paper studies the relationship between the existing ventures of a firm and its incentives to undertake new ventures. We argue that whenever a firm undertakes a new venture, it does so with the risk that information associated with that venture will reflect on all of the firm's products. If the costs of bad news exceed the benefits of good news, the firm will be less likely to undertake the venture. This is the case in our model, in which an incumbent risks losing monopoly status in an established market should its new venture fail. Thus, incumbency can breed conservatism.

The economic theory of agency deals with the relationship that arises when one individual delegates authority to another. It offers powerful insights into the organization of health care delivery systems. This paper examines how relationships between doctors, patients, and hospitals can be explored within an agency framework and applied to institutional, fee-for-service, and HMO settings.

The physician/patient relationship is a paradigm for any expert/client relationship. The physician both diagnoses the patien t's illness and recommends a treatment. This dual role gives the phys ician incentive to recommend treatments whose costs outweigh their me dical benefits. These socially inefficient treatments correspond to t he notion of "physician-induced demand." The level of inducement chos en by the physician is shown to depend on the price and potential med ical benefits of treatment and the relative diagnostic skills of phys ician and patient. This model offers several testable hypotheses, som e of which are confirmed by related studies. Copyright 1988 by Oxford University Press.

This paper shows that a hospital whose objective function includes output as well as profits may raise price to private paying patients in response to cuts in the price it receives for Madicaid or Medicaid patients. Evidence is presented to show that hospitals in Illinois ‘cost-shifted’ in this manner in response to substantial reductions in Medicaid payments in the early 1980s. As private sector pricing becomes more competitive, however, the ability and willingness of hospitals to cost-shift will wane.

Recent developments in the theory of agency--the relationship that arises e when a principal delegates authority to an agent--offer powerful insights into the organization of health care delivery systems. In this paper we first provide an overview of the agency literature and then illustrate how relationships between doctors, patients, and hospitals can be explored within an agency framework. We find that not only the evolution of standard fee-for-service relationships but also the emergence of HMOs can be analyzed as responses to uncertainty and to difficulties in writing complete, enforceable contracts. These findings have broad implications for health policy and suggest a variety of strategies for addressing agency issues.

Under the system of hospital reimbursement for Medicare patients, hospitals receive a prospectively determined price that varies according to the diagnosis related group (DRG) to which the patient is assigned. Rate-setting by DRG encourages hospitals to specialize in those DRGs for which they have relatively low production costs. This may substantially reduce aggregate hospitalization costs if specializing hospitals are efficient. If, instead, hospitals specialize by treating relatively healthier patients within each DRG, cost savings may be mitigated. The wide variation of patient-specific costs within DRGs promotes the latter kind of specialization and reduces the effectiveness of rate-setting.

Preferred provider organizations (PPOs) and other discount health care purchasers are injecting price competition into the hospital market, which has hitherto been insulated from price competition by comprehensive and generous insurance coverage. Providing the discounts demanded by PPOs thus poses unaccustomed and difficult problems for hospitals. We constructed a model to study the choices forced by PPOs on the hospital market. We predict that prices will fall, excess capacity will be reduced, and some hospitals may develop financial problems. In the extreme case, prices will fall substantially, some hospitals will go bankrupt, excess capacity will be eliminated, and an unprecedented price volatility will be introduced into the market.

Although it is widely perceived that home nursing care reduces the utilization of hospital services, and thus the cost of care, the magnitude of the savings is not clear. In this study of a hospital-based home nursing care program, we compared the medical process at two hospitals, one with and one without a home nursing department. Regression analysis showed that home nursing care significantly reduced both the length of hospital stays and the number of follow-up visits to outpatient clinics. After accounting for the cost of the home nursing program, however, we found that the program did not significantly reduce overall hospital expenditures.OBJECTIVE: To examine the impact of home care on hospital days. DATA SOURCES: Search of automated databases covering 1964-1994 using the key words "home care," "hospice," and "healthcare for the elderly." Home care literature review references also were inspected for additional citations. STUDY SELECTION: Of 412 articles that examined impact on hospital use/cost, those dealing with generic home care that reported hospital admissions/cost and used a comparison group receiving customary care were selected (N = 20). STUDY DESIGN: A meta-analytic analysis used secondary data sources between 1967 and 1992. DATA EXTRACTION: Study characteristics that could have an impact on effect size (i.e., country of origin, study design, disease characteristics of study sample, and length of follow-up) were abstracted and coded to serve as independent variables. Available statistics on hospital days necessary to calculate an effect size were extracted. If necessary information was missing, the authors of the articles were contacted. METHODS: Effect sizes and homogeneity of variance measures were calculated using Dstat software, weighted for sample size. Overall effect sizes were compared by the study characteristics described above. PRINCIPAL FINDINGS: Effect sizes indicate a small to moderate positive impact of home care in reducing hospital days, ranging from 2.5 to 6 days (effect sizes of -.159 and -.379, respectively), depending on the inclusion of a large quasi-experimental study with a large treatment effect. When this outlier was removed from analysis, the effect size for studies that targeted terminally ill patients exclusively was homogeneous across study subcategories; however, the effect size of studies that targeted nonterminal patients was heterogeneous, indicating that unmeasured variables or interactions account for variability. CONCLUSION: Although effect sizes were small to moderate, the consistent pattern of reduced hospital days across a majority of studies suggests for the first time that home care has a significant impact on this costly outcome.

The phenomenon of regression to the mean might seriously bias estimates of the impact of hospital rate setting laws. We examine this problem and find that, while estimates of the average effectiveness of rate setting laws are not strongly affected, estimates for individual states may be skewed.

We measure the effect of six hospital closures on patient and total welfare. While patient welfare necessarily declines because some patients lose access to their preferred hospital, closures also affect costs. Recent research suggests that less efficient institutions are more likely to close and that surrounding hospitals are able to increase efficiency as result of scale economies. Thus, the net effect of closures, and the wisdom of hospital bailouts, is an empirical question. We find that hospital bailouts are usually unwise: on balance the cost savings from closures more than offset the reduction in patient welfare.

During the late 1990s, China introduced the gaizhi process for privatizing stateowned firms. Under gaizhi, managers could acquire their firms at a price that was based on recent profitability. Systematic analysis of longitudinal data reveals the following: (1) There is a statistically significant 4 percent decrease in net margin relative to trend in the one year period immediately prior to privatization; (2) There is no statistically meaningful difference in net margin in the period after privatization relative to the period one year or more before privatization. These findings suggest that managers intentionally suppressed the performance of their firms so as to acquire them at less than fair value. We test and reject other, more innocuous explanations for this profit pattern.

We adapt the bargaining model of Stole and Zweibel (S/Z) to study selective contracting between hospitals and managed care purchasers. A main feature of the S/Z model is what we call "level N" rationality. Specifically, if there are N suppliers bargaining with one purchaser then all players consider outcomes if each successive level of bargaining breaks down. We solve the S/Z model for all levels of rationality; for example, at level 1 rationality, bargainers only consider the consequences if one level of bargaining breaks down. We estimate the model using data from several markets in California. By comparing theoretical bargaining solutions to actual outcomes, we establish the level of rationality among bargainers in each market.

There are many markets in which a seller simultaneously diagnoses a customer’s needs and recommends a product or service to meet them.  Customers have limited information on which to judge the merits of the recommendation and may, as a result, agree to excessively costly or unnecessary services.  Plumbers, auto mechanics, and lawyers are just a few of the sellers who face the resulting potential for conflict of interest.   This asymmetry of information poses a theoretical conundrum.  What prevents sellers from always exaggerating the value of their products?  A simple but compelling answer is that consumers may choose not to purchase the product if the seller routinely exaggerates its value.  A corollary of this is that consumers may choose not to patronize sellers who exaggerate. 

In this paper, we examine whether the market does, in fact, punish overzealous sellers.  We focus on the market for physician services, specifically, deliveries.  Physicians may choose from one two possible modes of delivery: vaginal birth versus a more highly reimbursed alternative, cesarean section.  Our aim is to test whether physicians who prescribe a disproportionate number of cesarean sections (compared to what might be expected based on patient characteristics) experience a decline in patient share. 

Following Phelps (2003), who equates a physician’s predilection to perform a high cost procedure to that physician’s “practice style,” we measure the practice styles of obstetricians in several counties in Florida.  We then estimate a model of consumer choice of provider, where one of the factors weighing on the patient’s choice is practice style of the provider.  In most of the counties that we study, including the largest, we find that maternity patients prefer not to visit physicians with aggressive styles (i.e. physicians who overprescribe cesarean sections), ceteris paribus.  The effect is most pronounced for high income patients and HMO patients, two segments of the market that might be very attractive to some obstetricians. 

Objective: We examine the financial impact of major illnesses on the near-elderly and how this impact is affected by health insurance.

Data Sources: We use RAND Corporation extracts from the Health and Retirement Survey from 1992-2006.

Study Design:  Our dependent variable is the change in household assets, excluding the value of the primary home.  We use triple difference median regressions on a sample of newly ill uninsured near elderly (under age 65) matched to newly ill insured near elderly.  We also include a control group of individuals who are not ill.

Results:  Controlling for the effects of insurance status and illness, we find that the median household with a newly ill uninsured individual suffers a statistically significant decline in household assets of approximately 30 percent relative to households with matched insured individuals.  Newly ill insured individuals do not experience a decline in wealth.

Conclusions:  While insured newly ill individuals are protected against financial loss, the uninsured appear to be one illness away from financial catastrophe.