Hospital Behavior Under Competition and Cost-Containment Policies

Previous studies of hospital competition have found that greater competition leads to higher hospital costs. We describe herein the change in behavior of California's hospitals since the introduction of competitive and cost-containment programs. To examine the impact of California's pro-competition policies on hospital performance, we grouped the state's short-term hospitals according to the level of competition within their markets. From 1983 through 1985, total inpatient costs (inflation adjusted) increased by less than 1% in hospitals in low-competition markets compared with a decrease of 11.29% in hospitals located in highly competitive markets. After controlling for the effects of the Medicare prospective payment system program, the rate of increase in cost per discharge in hospitals in highly competitive markets was 3.53% lower than the rate of increase in hospitals in low-competition markets during the period from 1983 through 1985. We conclude that these pro-competition policies are having dramatic and potentially far-reaching effects on the nature of hospital competition, leading to increased competition based on price.