NCPA - National Center for Policy Analysis

Hospital Competition Lowers Cost

March 22, 2000

Managed care has changed the impact of hospital competition on the quality of care, say researchers. Specifically, for elderly Americans with heart disease, before 1991, competition led to higher costs -- but lower rates of adverse health outcomes. After 1990, competition led both to substantially lower costs and to significantly lower rates of adverse outcomes.

Researchers measured the competitiveness of hospitals using such factors as patients' travel distances. Analyzing U.S. Medicare claims data for elderly beneficiaries admitted to a hospital with a heart attack (acute myocardial infarction) from 1985 to 1994, they found that:

  • As of 1991, it was approximately 8 percent more costly to be treated in the least competitive fourth of hospital markets, as compared to the most competitive fourth.
  • The quality of care in competitive markets was higher, with mortality among patients in the least competitive fourth of hospital markets approximately 1.5 percentage points higher than mortality in the most competitive areas.
  • Expressed as a share of 1994 average mortality from heart attacks in the elderly, competition had the potential to improve mortality by 4.4 percent.

Patients from the least competitive markets also experienced higher rates of readmission for some cardiac complications, suggesting the additional survivors attributable to competition in hospital markets were not in especially marginal health.

The increasing enrollment in Health Maintenance Organization over the period partially explains the dramatic change in the impact of hospital competition. Managed care appears to increase efficiency by reducing the tendency of hospital competition to cause excessive spending on medical care producing minimal benefits for patients.

Source: David R. Francis, "Hospital Competition Improves Quality and Lowers Cost," NBER Digest, March 2000; Stephen Mehay and Rosalie Liccardo Pacula, "Is Hospital Competition Socially Wasteful?" NBER Working Paper No. 7266, July 1999, National Bureau Of Economic Research, 1050 Massachusetts Avenue, Cambridge, Mass. 02138, (617) 868-3900.


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