Competition and Hospital Costs

To the Editor.— Drs Melnick and Zwanziger1report lower costs and costs per discharge since 1983 for California hospitals in "high-competition markets" because of legislation that promotes price-based selective contracting. We suggest that their results be interpreted cautiously. Increasing enrollment in health maintenance organizations (HMOs) (or competition from ambulatory-care providers) unrelated to bidding among hospitals can foster strategies that maintain net revenue by restraining costs. Hospitals also can respond to declines in demand by well-insured patients through greater selectivity of services and patients. Discharges declined more rapidly in the high-competition hospitals both before and after 1983,1(p2674)possibly an effect of expanding enrollment in HMOs. According to Friedman and Shortell,2the HMO market share was inversely associated with cost in 1985. The hospitals in the high-competition subsample of Drs Melnick and Zwanziger may have tended not to bid successfully for Medicaid patients, resulting in a less expensive, more