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Is Managed Care Leading to Consolidation in Health-care Markets?


  • Dranove David,

  • Carol J. Simon,

  • William D. White

We are grateful to the Agency for Healthcare Research and Quality (AHRQ) for support of this research under AHCPR Grant # R01 HS09210. We thank Min Guo and the American Hospital Association (AHA) for providing data on hospitals used in this research. We would like to thank participants in Harvard/Boston University/MIT Joint Health Economics Seminar and sessions at the annual meetings of the American Economics Association and American Public Health Association and two anonymous referees for comments. The opinions expressed in this paper are, however, the authors. They do not necessarily reflect the positions or policies of AHRQ or the AHA.

Address correspondence to David Dranove, Ph.D., Professor, Northwestern University, 2001 Sheridan Road, Evanston, IL 60208. Carol J. Simon, Ph.D., is an Associate Professor at Boston University. William D. White, Ph.D., is an Associate Professor at Yale University.


Objective. To determine the extent to which managed care has led to consolidation among hospitals and physicians.

Data Sources. We use data from the American Hospital Association, American Medical Association, and government censuses.

Study Design. Two stage least squares regression analysis examines how cross-section variation in managed care penetration affects provider consolidation, while controlling for the endogeneity of managed-care penetration. Specifically, we examine inpatient hospital markets and physician practice size in large metropolitan areas.

Data Collection Methods. All data are from secondary sources, merged at the level of the Primary Metropolitan Statistical Area.

Principal Findings. We find that higher levels of local managed-care penetration are associated with substantial increases in consolidation in hospital and physician markets. In the average market (managed-care penetration equaled 34 percent in 1994), managed care was associated with an increase in the Herfindahl of .054 between 1981 and 1994, moving from .096 in 1981 to .154. This is equivalent to moving from 10.4 equal-size hospitals to 6.5 equal-sized hospitals. In the physician market place, we estimate that at the mean, managed care resulted in a 14 percentage point decrease of physicians in solo practice between 1986 and 1995. This implies a decrease in the percentage of doctors in solo practice from 38 percent in 1986 to 24 percent by 1995.