Hospital markets are rapidly changing; managed care penetration is increasing at the same time that hospitals are joining forces with other hospitals and with physician groups. This research project uses a structural model to investigate the impact of three trends in hospital markets, including the expansion of managed care, horizontal integration, and vertical alignment between hospitals and physicians. The study addresses three key questions: To what extent has growing managed care affected the price and quality elasticity of demand for inpatient hospital services? Can hospitals that form networks and systems maintain higher prices than hospitals that do not? And, finally, do hospitals that form contracting arrangements with physicians have greater market power than other hospitals? These issues are of primary important to federal and state regulators, including public purchasers and antitrust authorities, who evaluate the potential efficiency, access, anticompetitive, and quality impacts of hospital's horizontal and vertical strategies on delivery of hospital services. Medicare, for example, has recently promoted the formation of Provider- Sponsored Organizations, which integrate hospital and physician services. Medicare and Medicaid policymakers alike have a stake in understanding the potential impact of new organizational forms and procurement systems. This study contributes to the existing research by simultaneously investigating both demand and supply effects of managed care and hospital integration strategies. A structural model, compared to most of the existing reduced-form studies on these topics, is particularly suited for simulations of market changes.
