Incentives in HMOs

We study the effect of physician incentives in an HMO network. Physician incentives are controversial because they may induce doctors to make treatment decisions that differ from those they would chose in the absence of incentives. We set out a theoretical framework for assessing the degree to which incentive contracts do in fact induce physicians to deviate from a standard guided only by patient interests and professional medical judgement. Our empirical evaluation of the model relies on details of the HMO's incentive contracts and access to the firm's internal expenditure records. We estimate that the HMO's incentive contract provides a typical physician an increase, at the margin, of $0.10 in income for each$1.00 reduction in medical utilization expenditures. The average response is a 5 percent reduction in medical expenditures. We also find suggestive evidence that financial incentives linked to commonly used quality measures may stimulate an improvement in measured quality.

Household Demand for Employer-Based Health Insurance

We use the 1996 Medical Expenditure Panel Survey to estimate a model of household demand for employer-based health insurance, explicitly investigating differences in behavior between households with two potential sources of coverage and those with one source. Own and cross-price elasticities are estimated for three types of health plans, including exclusive provider organizations, any provider organizations, and mixed provider organizations. We find that the premium, family size, income, and wealth significantly affect demand. Our elasticity estimates reveal an overall, small behavioral response to changes in price with respect to health plan switching and take-up. Finally, we discuss the implications of our findings with respect to employer benefit design.

Entry and Competition in Local Hospital Markets

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.analysis of health care markets

"Incentives In HMOs"

We studied the effect of physician incentives in an HMO network. Physician incentives are controversial because they may induce doctors to make treatment decisions that differ from those they would choose in the absence of incentives. We set out a theoretical framework for assessing the degree to which incentive contracts do, in fact, induce physicians to deviate from a standard, guided only by patient interest and professional medical judgment. Our empirical evaluation of the model relies on details of the HMO's incentive contracts and access to the firms' internal expenditure records. We estimate that the HMO's incentive contract provides a typical physician an increase, at the margin, of $.10 in income for each$1.00 reduction in medial utilization expenditures. The average response is a 5-percent reduction in medical expenditures. We also find suggestive evidence that financial incentives linked to commonly used "quality" measures may stimulate an improvement in measured quality.

Incentives in HMO's

We study the effect of physician incentives in an HMO network. Physician incentives are controversial because they may induce doctors to make treatment decisions that differ from those they would chose in absence of incentives. We set out a theoretical framework for assessing the degree to which incentive contracts do in fact induce physicians to deviate from a standard guided only by patient interests and professional medical judgement. Our empirical evaluation of the model relies on details of the HMO's incentive contracts and access to the firm’s internal expenditure records. We estimate that the HMO's incentive contract provides a typical physician an increase, at the margin of $0.10 in income for each$1.00 reduction in medical utilisation expenditures. The average response is a 5% reduction in medical expenditures. We also find suggestive evidence that financial incentives linked to commonly used "quality" measure may stimulate an improvement in measured quality.analysis of health care markets

Does the Profit Motive Make Jack Nimble? Ownership Form and the Evolution of the U.S. Hospital Industry

We examine the evolving structure of the U.S. hospital industry since 1970, focusing on how ownership form influences entry and exit behavior. We develop theoretical predictions based on the model of Lakdawalla and Philipson, in which for-profit and not-for-profit hospitals differ regarding their objectives and costs of capital. The model predicts for-profits would be quicker to enter and exit than not-for-profits in response to changing market conditions. We test this hypothesis using data for all U.S. hospitals from 1984 through 2000. Examining annual and regional entry and exit rates, for-profit hospitals consistently have higher entry and exit rates than not-for-profits. Econometric modeling of entry and exit rates yields similar patterns. Estimates of an ordered probit model of entry indicate that entry is more responsive to demand changes for for-profit than not-for-profit hospitals. Estimates of a discrete hazard model for exit similarly indicate that negative demand shifts increase the probability of exit more for for-profits than not-for-profits. Finally, membership in a hospital chain significantly decreases the probability of exit for for-profits, but not not-for-profits.

Competition among Hospitals

We examine competition in the hospital industry, in particular the effect of ownership type (for-profit, no-for-profit, government). We estimate a structural model of demand and pricing in the hospital industry in California, then use the estimates to simulate the effect of a merger. California hospitals in 1995 face an average price elasticity of demand of -4.85. Not-for-profit hospitals face less elastic demand and act as if they have lower marginal costs. Their prices are lower than for-profits, but markups are higher. We simulate the effects of the 1997 merger of two hospital chains. In San Luis Obispo County, where the merger creates a near monopoly, prices rise by up to 53%, and the predicted price increase would not be substantially smaller were the chains not-for-profits.analysis of health care markets

Entry and Competition in Local Hospital Markets

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 competition in local markets for hospital services. We examine the effect of market structure on competition in local hospital markets -- specifically, does the hardness of 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 U.S. hospital industry. In the hospital markets we examine, entry leads to a quick convergence to competitive conduct. Entry reduces variable profits and increases quantity. Most of the effects of entry come from having a second and a third firm enter the market. The fourth entrant has little estimated effect. The use of quantity information allows us to infer that entry is consumer-surplus-increasing.

Does the Profit Motive Make Jack Nimble? Ownership Form and the Evolution of the U.S. Hospital Industry

We examine the evolving structure of the U.S. hospital industry since 1970, focusing on how ownership form influences entry and exit behavior. We develop theoretical predictions based on the model of Lakdawalla and Philipson, in which for-profit and not-for-profit hospitals differ regarding their objectives and costs of capital. The model predicts for-profits would be quicker to enter and exit than not-for-profits in response to changing market conditions. We test this hypothesis using data for all U.S. hospitals from 1984 through 2000. Examining annual and regional entry and exit rates, for-profit hospitals consistently have higher entry and exit rates than not-for-profits. Econometric modeling of entry and exit rates yields similar patterns. Estimates of an ordered probit model of entry indicate that entry is more responsive to demand changes for for-profit than not-for-profit hospitals. Estimates of a discrete hazard model for exit similarly indicate that negative demand shifts increase the probability of exit more for for-profits than not-for-profits. Finally, membership in a hospital chain significantly decreases the probability of exit for for-profits, but not not-for-profits.

Entry and Competition in Local Hospital Markets

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 U.S. hospital industry. The results from the estimation are striking. In the hospital markets we examine, entry leads to markets becoming competitive quickly. Entry reduces variable profits and increases quantity. 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 consumer welfare increasing.