Revisiting the Relationship between Managed Care and Hospital Consolidation

Objective

This paper analyzes whether the rise in managed care during the 1990s caused the increase in hospital concentration.

Data Sources

We assemble data from the American Hospital Association, InterStudy and government censuses from 1990 to 2000.

Study Design

We employ linear regression analyses on long differenced data to estimate the impact of managed care penetration on hospital consolidation. Instrumental variable analogs of these regressions are also analyzed to control for potential endogeneity.

Data Collection

All data are from secondary sources merged at the level of the Health Care Services Area.

Principle Findings

In 1990, the mean population‐weighted hospital Herfindahl–Hirschman index (HHI) in a Health Services Area was .19. By 2000, the HHI had risen to .26. Most of this increase in hospital concentration is due to hospital consolidation. Over the same time frame HMO penetration increased three fold. However, our regression analysis strongly implies that the rise of managed care did cause the hospital consolidation wave. This finding is robust to a number of different specifications.