Is the Impact of Managed Care on Hospital Prices Decreasing?

Prior studies find that the growth of managed care through the early 1990s introduced a strong positive relationship between price and concentration in hospital markets. We hypothesize that the relaxation of constraints on consumer choice in response to a managed care backlash has diminished the price sensitivity of demand facing hospitals, reducing or possibly reversing the price concentration relationship. We test this hypothesis by studying the price/concentration relationship for hospitals in California and Florida for selected years between 1990 and 2001, while addressing the potential endogeneity of concentration. We find an increasingly positive price/concentration relationship through 1999. Between 1999 and 2001, the relationship weakens and possibly reverses.