Academic journal article American Economist

Are Big Hospitals the Best Medicine

Academic journal article American Economist

Are Big Hospitals the Best Medicine

Article excerpt

1.0 Introduction

The health care issue has exploded to the top of the American political agenda. In the process, attention has increasingly focused on health care providers, especially hospitals, as centerpieces in the supply of medical services. However, the hospital industry scarcely fits the model of the traditional textbook market: Due to the preponderance of third-party payers, the typical consumer receives a good for which he or she pays only a small part of the total price. Moreover, the consumer has little or no expertise for evaluating the service being purchased.

Transcending these anomalies is a hot debate concerning the most efficient market structure for delivering hospital services. On one side, some contend that smaller hospital size and more competitive market structures in hospital services are less efficient, and serve to substantially and artificially inflate hospital costs and prices. On the other side it is argued that smaller size and competitively structured markets are essential to ensure that consumers and society are not harmed in traditionally monopolistic ways.

Which of these opposing views is correct has dramatically significant implications for policy makers: If greater size engenders lower prices and more efficiency then policy makers should encourage consolidation in order to achieve these benefits. If, however, smaller hospitals are found to be more efficient, and therefore more advantageous to consumers, then vigorous enforcement of antitrust laws by the Federal Trade Commission (FTC) and the Department of Justice (DOJ) would be in order to combat hospital combinations.

The idea of size is one that is easily blurred. Both relative and absolute size would seem to play a role in the cost structure of hospitals. Market concentration is the number of firms providing hospital services within a defined market area, which therefore gives an idea as to relative size; while firm size is the size of an individual firm within the market, that is, absolute size. It is conceivable to have a highly concentrated market, i.e. relatively few firms, which in fact has rather small hospitals. While both issues are of interest in the debate over the hospital industry, they should not be seen as redundant. The material covered herein deals with individual hospital size as its main area of inquiry.

2.0 Theory

The theoretical debate can be easily classified into two distinct divisions. On one side, is the increasing monopoly theory (Salkever 1978). This theory indicates that the lower the concentration and the representative size of a hospital in a particular hospital market, the higher will be the prices.

In justifying this, Salkever cites that in most cases, hospitals do not pay physicians. Rather they must attract physicians to their facility via attractive arrangements. Such arrangements might be high technology equipment, or increased staff. As hospitals compete with each other to woo the best physicians, they become entrapped in a type of "medical arms race." This drives up costs and in turn drives up the prices charged to the consumer.

Salkever argues that the consumer is made worse off by this competition. In essence, his argument is that hospital services are a natural monopoly, that is "competition is unworkable, unsustainable, and socially undesirable."(1) Nett (1992) also argues this point, modeling medical services under both the monopoly case and the competitive case. He concludes that any more than one provider in a market is inefficient.

On the opposite side is the traditional oligopoly approach which argues that there is a direct relationship between market concentration and hospital size and the prices they charge. More concentration leads to higher prices as hospitals no longer must compete as strongly with each other. A common, though not certain, by-product of increased concentration is larger hospitals. …

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