Town R & Vistnes G, (2001)

‘Hospital Competition in HMO Networks’

Journal of Health Economics 20(4), pp. 733-53

• Empirical analysis of how hospitals compete in a selective contracting environment, using data from two large Californian HMOs.
• Tests the hypothesis that a hospital’s price is constrained by the degree of substitutability between an HMO’s current hospital network and its next best alternative network that excludes the hospital.
• Simulates mergers between hospitals to investigate the effect on prices.

Key results:

• The authors’ hypothesis is confirmed: a hospital’s bargaining power and thus its price, decrease when the HMO can readily turn to alternative networks that exclude the hospital.
• Even in an urban area such as Los Angeles with a high hospital density, there is enough differentiation among hospitals to allow for some exercise of market power.
• By simulating mergers in Los Angeles the authors find that a significant number of those simulated mergers lead to predicted price increases of over 5%.

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