Three essays on hospital competition

textTheories of competitive for-profit firm behavior are well understood. However, in the hospital industry, more than three-quarters of the hospitals are nonprofit or government organizations that may not maximize profits. Given the growing presence of managed care plans and capitation based reimbursement policies, hospital responses to increased competition need to be better understood. This dissertation explores these issues from both empirical and theoretical perspectives. The first essay investigates the determinants of hospital mergers, acquisitions, and closures. Duration analysis models time-to-exit in terms of characteristics of hospitals prior to merger, acquisition, or closure. This estimation technique allows for increased statistical efficiency because it explicitly incorporates time into the model. Results suggest that larger hospitals and hospitals with productive inefficiencies are more likely to merge and close. In addition, increased market concentration decreases the occurrence of mergers, acquisitions, and closures on average. The second essay uses three simple theoretical models of nonprofit hospitals to investigate equilibrium behavior when hospitals compete and merge. We find that the specification of the nonprofit motive influences the results. When nonprofit hospitals care about serving the uninsured, prices fall as the market becomes more competitive. However, when the nonprofit motive is quality maximization, prices and quality rise. In addition, when a nonprofit acquires a for-profit hospital, we find that even if the nonprofit is pursuing objectives other than profit maximization, prices for the acquiring hospital unambiguously rise after a merger. The third essay uses nonparametric estimation techniques to examine the potential and actual cost savings from a merger. In addition, we investigate how similarities between the merging pairs affect the cost savings from a merger. Our findings suggest that mergers have the potential to save costs, but these cost savings are not realized. Specifically, the output mix is altered for mergers between teaching and nonteaching hospitals in such a way that any possible cost savings are eliminated. In contrast, mergers between two large hospitals tend to decrease both potential and actual cost savings.Economic