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How Do Hospitals Respond to Market Entry? Evidence from a Deregulated Market for Cardiac Revascularization

Suhui Li

George Washington University

Avi Dor

Case Western Reserve University - Department of Economics; National Bureau of Economic Research (NBER)

March 2013

NBER Working Paper No. w18926

Regulatory entry barriers to hospital service markets, namely Certificate of Need (CON) regulations, are enforced in many states; although no longer federally mandated, policy makers in other states are considering reinstating CON policies in tandem with service expansions mandated under the Affordable Care Act. While numerous studies have examined the impacts of CON on hospital volumes, demand responses to actual hospital entry into local hospital markets are not well understood. In this paper, we empirically examine the demand-augmenting, demand-redistribution, and risk-allocation effects of hospital entry by studying the cardiac revascularization markets in Pennsylvania, a state in which dynamic market entry occurred after repeal of CON in 1996. Our findings with respect to demand-augmentation are mixed: we find robust evidence that high entrant market share mitigated the declining incidence of coronary artery bypass graft (CABG), but it had no significant effect on the rising trend in percutaneous coronary intervention (PCI) procedures, among patients with coronary artery disease. Consequently, incumbent hospitals experienced a decrease in the likelihood of PCI due to entry, thereby indicating a shift in demand away from incumbents to entrants, namely business-stealing. Results of our analyses further indicate that entry by new cardiac surgery centers tended to sort high-severity patients into the more invasive CABG procedure and low-severity patients into the less invasive PCI procedures. Thus, from a welfare perspective our results are mixed: on the one hand, free-entry may lead to improved access rather than business stealing for CABG procedures; on the other hand, the empirical evidence is in favor of business-stealing for PCI procedures. Moreover, free-entry improves the match between underlying medical risk and treatment intensity. These findings underscore the importance of considering market-level strategic responses by hospitals when regulatory barriers to entry are rescinded.

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Date posted: March 30, 2013  

Suggested Citation

Li, Suhui and Dor, Avi, How Do Hospitals Respond to Market Entry? Evidence from a Deregulated Market for Cardiac Revascularization (March 2013). NBER Working Paper No. w18926. Available at SSRN: http://ssrn.com/abstract=2241919

Contact Information

Suhui Li (Contact Author)
George Washington University ( email )
Avi Dor
Case Western Reserve University - Department of Economics ( email )
Cleveland, OH 44106
United States
216-368-4110 (Phone)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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