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Competition and Health-Care Spending: Theory and Application to Certificate of Need Laws

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  • James Bailey
  • Tom Hamami

Abstract

Hospitals and other health-care providers in 34 states must obtain a Certificate of Need (CON) from a state board before opening or expanding, leading to reduced competition. We develop a theoretical model of how market concentration affects health-care spending. Our theoretical model shows that increases in concentration, such as those brought about by CON, can either increase or decrease spending. Our model predicts that CON is more likely to increase spending in markets in which costs are low and patients are sicker. We test our model using spending data from the Household Component of the Medical Expenditure Panel Survey (MEPS).

Suggested Citation

  • James Bailey & Tom Hamami, 2019. "Competition and Health-Care Spending: Theory and Application to Certificate of Need Laws," Working Papers 19-38, Federal Reserve Bank of Philadelphia.
    • Handle: RePEc:fip:fedpwp:19-38
    DOI: https://doi.org/10.21799/frbp.wp.2019.38
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    References listed on IDEAS

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    1. Martin Gaynor & Kate Ho & Robert J. Town, 2015. "The Industrial Organization of Health-Care Markets," Journal of Economic Literature, American Economic Association, vol. 53(2), pages 235-284, June.
    2. Martin Gaynor & Deborah Haas-Wilson & William B. Vogt, 2000. "Are Invisible Hands Good Hands? Moral Hazard, Competition, and the Second-Best in Health Care Markets," Journal of Political Economy, University of Chicago Press, vol. 108(5), pages 992-1005, October.
    3. Sloan, Frank A, 1981. "Regulation and the Rising Cost of Hospital Care," The Review of Economics and Statistics, MIT Press, vol. 63(4), pages 479-487, November.
    4. Lanning, Joyce A & Morrisey, Michael A & Ohsfeldt, Robert L, 1991. "Endogenous Hospital Regulation and Its Effects on Hospital and Non-hospital Expenditures," Journal of Regulatory Economics, Springer, vol. 3(2), pages 137-154, June.
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    More about this item

    Keywords

    competition; health-care spending; Certificate of Need; Medical Expenditure; Panel Study of Income Dynamics;
    All these keywords.

    JEL classification:

    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

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