Competition among hospitals

A number of different economic models have been constructed to explain the behavior of hospitals. These models vary considerably in their postulated objectives for the hospital and in the roles which they assign to the medical staff and hospital administrators in the decision-making process. According to some, the preferences of the hospital are defined in terms of the quantity and quality of its output. Others view the maximization of staff physicians' incomes as the hospital's primary objective. However, virtually all these models share the presumption that the structure of the market for hospital services deviates from the standard of perfect competition and hence that the hospital is a price setter rather than a price taker. While a change in financing arrangements is probably the most powerful way to influence competitive behavior, other structural changes may have at least marginal effects. For example, ending restrictions on proprietaries and increases in the availability of information on costs may generate slightly more price competition. Open-staffing arrangements for use of highly specialized equipment could perhaps diminish competitive pressures for every hospital to offer a full range of services although the inconvenience to the physician of hospitalizing patients at many different institutions argues against this. There are also difficulties involved in moving to a hospital system with greater price competition. The creation of more competitive markets may be hindered by several factors. The present high degree of seller concentration in many local markets may be largely due to economies of scale and thus not easily diminished. The possibility is that minimum quality regulation can impede competition. Assuming that such regulation is desirable for protecting the public and should be maintained, the political problem of preventing misuse of this regulatory instrument to further providers' interests is formidable. The present mode of financing - through cross-subsidization and prices in excess of costs for more 'profitable' services - will be difficult to maintain in the presence of greater price competition.