Advances in structural demand estimation have substantially improved economists' ability to forecast the impact of mergers. However, these models rely on extensive assumptions about consumer choice and firm objectives, and ultimately observational methods are needed to test their validity. Observational studies, in turn, suffer from selection problems arising from the fact that merging entities differ from non-merging entities in unobserved ways. To obtain an unbiased estimate of the effect of consummated mergers, I propose an approach that focuses on the response of rivals to mergers and accounts for the endogeneity of exposure to these mergers. I apply this approach to evaluate the impact of independent hospital mergers in the U.S. between 1989 and 1996. Using the physical co-location of rivals as an instrument for whether they merge, I find a sizeable, one-time increase in price following a rival’s merger, with the greatest increase occurring among hospitals nearest to the merging hospitals. These results are more consistent with predictions from structural models of the hospital industry than with prior observational estimates of the effects of hospital mergers.Advances in structural demand estimation have substantially improved economists' ability to forecast the impact of mergers. However, these models rely on extensive assumptions about consumer choice and firm objectives, and ultimately observational methods are needed to test their validity. Observational studies, in turn, suffer from selection problems arising from the fact that merging entities differ from non-merging entities in unobserved ways. To obtain an accurate estimate of the effect of consummated mergers, I propose a combination of rival analysis and instrumental variables. By focusing on the effect of a merger on the behavior of rival firms, and instrumenting for these mergers, unbiased estimates of the effect of a merger on market outcomes can be obtained. Using this methodology, I evaluate the impact of all independent hospital mergers between 1989 and 1996 on rivals’ prices. I find sharp increases in rivals’ prices following a merger, with the greatest effect on the closest rivals. The results for this industry are more consistent with predictions from structural models than with prior observational estimates.

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.

Strategic investment models, though popular in the theoretical literature, have rarely been tested empirically. This paper develops a model of strategic investment in inpatient procedure markets, which are well-suited to empirical tests of this behavior. Potential entrants are easy to identify in such markets, enabling the researcher to accurately estimate the entry threat faced by different incumbents. I derive straightforward empirical tests of entry deterrence from a model of patient demand, procedure quality, and differentiated product competition. Using hospital data on electrophysiological studies, an invasive cardiac procedure, I find evidence of entry-deterring investment. These findings suggest that competitive motivations play a role in treatment decisions.

This paper examines hospital responses to changes in diagnosis-specific prices by exploiting a 1988 policy reform that generated large price changes for 43 percent of Medicare admissions. I find hospitals responded primarily by “upcoding” patients to diagnosis codes with the largest price increases. This response was particularly strong among for-profit hospitals. I find little evidence hospitals increased the volume of admissions differentially for diagnoses subject to the largest price increases, despite the financial incentive to do so. Neither did they increase intensity or quality of care in these diagnoses, suggesting hospitals do not compete for patients at the diagnosis level.

The 1983-1996 period saw enormous expansions in access to public health insurance for low-income children. We explore the impact of these expansions on child hospitalizations. While greater access to inpatient care may increase hospital utilization, improved efficiency of care for children who are also newly-eligible for primary care could lower hospitalization rates. We use a large sample of child discharges from the National Hospital Discharge Survey to assess the net impact of Medicaid expansions on hospitalizations during this period. We find that total hospitalizations increased significantly, with each 10 percentage-point rise in eligibility leading to an 8.4 percent increase in hospitalizations. Thus, the access effect strongly outweighs any efficiency effect produced by expanded coverage. However, we find some support for an efficiency effect: the increase in hospitalizations for unavoidable conditions is much larger than that for avoidable conditions that are most sensitive to outpatient care. Indeed, the increase in avoidable hospitalizations is less than half that of unavoidable hospitalizations, and it is not significant. We also find that expanded Medicaid eligibility reduced the average length of stay, but increased the utilization of inpatient procedures, so that the net impact on total costs per stay is ambiguous.

Although the vast majority of Americans have private health insurance, researchers focus almost exclusively on public provision. Data on the private insurance sector is extremely difficult to obtain because health insurance contracts are complex, renegotiated annually, and not subject to reporting requirements. This study makes use of a privately-gathered national database of insurance contracts agreed upon by a sample of large, multisite employers between 1998 and 2005. To gauge the competitiveness of the group insurance industry, I investigate whether health insurers successfully negotiate higher premiums for employers with deeper pockets. I find they do, and this result is not driven by cross-sectional differences across firms or plans: firms with positive profit shocks subsequently pay higher premiums, even for the same healthplans. Moreover, this relationship is strongest in geographic markets served by a small number of insurance carriers. Further analysis suggests profits act to increase employers’ switching costs, and insurers exploit this inelasticity in markets where they have sufficient bargaining power. Collectively, the results imply a combination of switching costs and bargaining power of insurers yields uncompetitive outcomes in an increasing number of local markets.