Physician market power

There’s vastly more economics literature on the effects of hospital market power than physician market power. So, the working paper by Abe Dunn and Adam Hale Shapiro (ungated pdf) is a welcome contribution.

We find that physician concentration is positively and significantly correlated with service price levels. Specifically, a 10 percent increase in the FTHHI [fixed-travel-time Herfindahl-Hirshman Index] will cause about a 1 percent increase in physician fees. Linking this finding to historical survey data discussed in Rebitzer and Vortruba [2011] implies that physician consolidation has caused about an 8 percent increase in fees over the last two decades (1988 to 2008). We also find that health-plan concentration is inversely correlated with service price fees. That is, insurance carriers in more concentrated health insurance markets pay lower fees to physicians.

We find a price elasticity of supply in the range of 0.27 to 0.34 for orthopedists and 0.57 to 1.26 for cardiologists. While in most markets an upward sloping supply curve would be unsurprising, in the health service market, this means that physicians treat patients according to service price levels. In other words, a physician with a higher price-cost margin will perform more services. On the demand side, we find a service price elasticity of demand in the range of -0.32 to -0.43 for orthopedics and -0.05 to -0.28 for cardiology patients. This finding supports prior research which suggest that patients are price sensitive, but relatively inelastic (Manning et al. [1987] and Keeler and Rolph [1988]).


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