Is Hospital Competition Wasteful?

TLDR

Recent attention has focused on whether local hospital competition leads to costly duplication of specialized services—the “medical arms race”—or whether supply is driven solely by market extent. The study aims to model how specialized services are provided in local hospital markets. The authors develop a predictive model of specialized service provision in local markets. Analysis of California hospitals shows little evidence for a medical arms race but indicates significant scale economies for many services, underscoring that mis‑specifying market extent inflates perceived competition.

Abstract

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.