• Market power of rural hospitals

    In a comment yesterday, steve wrote,

    Has anyone looked at the issue of market power in the context of rural vs urban providers? Most of the cases I have seen cited seem to identify large urban facilities, often university affiliated, as market powers. I would think that isolated, rural hospitals would have the same negotiating power, yet my experience would indicate that it seldom works that way.

    It just so happens that today I was reading “Can Hospitals And Physicians Shift The Effects Of Cuts In Medicare Reimbursement To Private Payers?” by Paul Ginsberg in which he wrote,

    The potential for cost shifting is also likely to vary geographically. Hospitals probably have more market power in smaller communities because concentration tends to be higher. Providers in small communities also might face more effective pressures to keep rates as low as possible. Both combined suggest that cost shifting has the potential to be more extensive. Indeed, many in contact with the insurance industry have noted sharp increases in rural hospital payment rates to private insurers in response to Medicare payment rate reductions resulting from the 1997 BBA. Rural hospitals, which tend to be natural monopolies, could have held rates way below their potential, so that when Medicare payment rates fell in relation to their costs, they could then raise rates to private insurers.

    By the way, Ginsberg’s paper does a very nice job of laying out the most basic variants of cost shifting theory. There are more nuanced and complex theories out there that he doesn’t describe (not a critique, just a fact).

      • @steve – Why wouldn’t rural doctors maximize incomes indeed!? You think like an economist. 🙂 To the extent the thinking is more than just cultural or ideological hogwash (and I’m not saying it is), one idea is that doctors have more of a humanitarian mission than other business folks. So they may provide some care below profit maximizing price. At a more general level, if anybody is maximizing a utility function that includes more than just profit (like prestige or has a charity component) then they’re not profit maximizing.

        @Brad F – That’s a fine paper too, one I commented on here: http://theincidentaleconomist.com/causality-and-cost-shifting/ . (I know you know I’m just letting all 3 other people who might read this know.)

    • I actually like both of those, but it still leaves questions unanswered. Mind you I am just a humble country doctor, not a trained economist, but it remains unclear why providers do not maximize incomes when able to do so. Why not maximize income from private insurers all of the time? The answers here seem inadequate.

      Expectations may be part of it. As long as I have been practicing rural places have usually paid less for docs. However, there are notable exceptions, and docs know what their urban counterparts are earning. This all assumes that docs do not behave like other people when it comes to maximizing income. At any rate, thx for pointing to me this.


    • Steve
      You are active here, and I always read your comments. Aside from bumming free economics tutorials from AF, one of our common bonds, we both are docs who are interested in this kind of subject matter. Where do you practice and what kind of doc are you?


    • Austin- So docs arent all greedy bastards? I knew that, but try to convince others.

      Brad- Bethlehem, PA. Anesthesiology. 20 docs, 20 CRNAs, roughly. I am currently the group president. I doubt very much that Austin has come across my small blog. It is a multi-author blog. Covers a bunch of topics. I read mostly econ and foreign policy blogs. I find it unethical to promote on other’s blogs, but I will list it here once if you are interested. We just recently had it shut down because of a (false) breaking of terms of service. I am hoping it stays up. Don’t expect Tyler Cowen quality writing. 🙂 Since I know lots of folks are missing good stuff here, I do try to echo some of Austin’s stuff.



      • @steve – Yes, I’ve come across your blog. I look at most blogs that cite me. Google Alerts and having a unique personal name and unique blog name really helps track those down.