How Well Do Travel Cost Models Measure Competition Among Hospitals?

36 Pages Posted: 18 Sep 2011 Last revised: 12 Dec 2012

Michael J. Doane

Competition Economics LLC

Luke Froeb

Vanderbilt University - Strategy and Business Economics

R. Lawrence Van Horn

Vanderbilt University - Strategy and Business Economics

Date Written: March 10, 2012

Abstract

Health plans create competition among hospitals by threatening to “steer” patients to preferred facilities. Mergers can reduce this competition and economists have begun using travel cost demand models to predict their effects. In this paper, we document an anomaly in estimation: for any plausible estimate of the opportunity cost of time, the price of hospital service is several orders of magnitude larger than the estimated value that patients place on the service. This anomaly raises questions about how well travel cost models measure demand for medical care, competition among hospitals, and the increase in bargaining power created by merger.

Keywords: hospital competition, hospital merger, patient choice, demand estimation, travel cost estimation, bargaining, merger, antitrust

JEL Classification: C25, C78, L41

Suggested Citation

Doane, Michael J. and Froeb, Luke and Van Horn, R. Lawrence, How Well Do Travel Cost Models Measure Competition Among Hospitals? (March 10, 2012). Vanderbilt Owen Graduate School of Management Research Paper No. 2012-06. Available at SSRN: https://ssrn.com/abstract=1928960 or http://dx.doi.org/10.2139/ssrn.1928960

Michael J. Doane

Competition Economics LLC ( email )

2000 Powell Street
Suite 510
Emeryville, CA 94608
United States
510-655-7503 (Phone)

Luke M. Froeb (Contact Author)

Vanderbilt University - Strategy and Business Economics ( email )

Nashville, TN 37203
United States
615-322-9057 (Phone)
615-343-7177 (Fax)

R. Lawrence Van Horn

Vanderbilt University - Strategy and Business Economics ( email )

Nashville, TN 37203
United States

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