The Effects of Endogenous Market Entry of Physician-Owned Hospitals on Medicare Expenditures: An Instrumental Variables Approach

Abstract:     
This study examines the effect of physician-owned hospitals (POHs) on Medicare per enrollee expenditures at the metropolitan area (MSA) level nationwide, spanning the 8-year time period from 1998 to 2005. The study uses fixed effects panel data estimation with instrumental variables to account for the bias introduced by endogenous POH market entry (i.e., POHs may be more likely to open in high-growth/high-demand markets with high levels of Medicare per enrollee expenditures). After controlling for other variables that are likely to affect expenditures (especially the age and sex distribution of the MSA), we find no association between POH presence and Medicare expenditures per enrollee at the MSA level. The results are robust to changes in model specification, estimation technique, and definition of geographic market. These findings suggest that the "demand inducement" aspects of physician ownership of acute care hospitals (if any) have no meaningful impact on market-level Medicare expenditures per enrollee. Current policies based on an assumption that POHs are associated with significant increases in total expenditures may need to be reassessed.

Number of Pages in PDF File: 12

JEL Classification: I11, L10, C33

Accepted Paper Series