Venue: The Fuqua School of Business, Duke University, 1 Towerview Drive, Durham, NC 27708-0120
Presentation
Does Entry by Single-Specialty Competitors Affect the Provision of Uncontested Services? Evidence from Arizona and Florida
Single-specialty hospitals (SSHs) and ambulatory surgery centers (ASCs) aim to attract primarily patients suited for standard, low risk procedures. Under the current prospective payment system based on diagnosis groups, incumbent general community hospitals may see their ability to cross-subsidize unprofitable services compromised if the least complex cases are diverted away from them. The welfare effects from disturbing this mechanism of financing care on uncontested services may be greater than the impact on quality of care as surgical volume is spread across more facilities than before entry.
We test these hypotheses by comparing incumbent hospitals that operate in the same market but vary in the share that the services contested by entering SSHs and ASCs comprise in the overall operations of these hospitals. Current studies, focused on the effect of entry by SSHs and ASCs on markets for contested services, are plagued by an inherent endogeneity problem as entry is not random. By contrast, our within-market, between-hospital estimator reduces the possible endogeneity bias that arises from the fact that, in their location decisions, prospective entrants take into account the likely reaction of incumbent hospitals. In our case, variation in provision of uncontested services across markets is unlikely to be factored into the decision of a specialized entrant.
We use data on the universe of inpatient discharges in Arizona, which experienced substantial and sequential entry by SSHs, and data on inpatient and outpatient discharges and individual physicians in Florida to study the effect of entry by ASCs on incumbent hospitals. We also use these data to construct a variety of alternative exposure measures to perform robustness checks of the estimates.
We use these data to identify which incumbent hospitals were most strongly affected by SSH or ASC entry. We measure the degree of cross-subsidization that incumbent hospitals engage in by testing whether they responded to entry of competing ventures by modifying the volume of uncontested services. As we observe which uncontested services were cut by exposed incumbent hospitals, we are able to infer the profitability of these services in the markets under study. As a falsification test, we also test whether stand-alone hospitals that specialize in uncontested services, such as psychiatric care, were affected by SSH or ASC entry.