Is Entry Efficient? Lessons from Cardiac Surgery
- Presenter:
Chair: Didem Bernard; Discussant: TBA Mon June 5, 2006 17:15-18:45 Room 313
By regulating entry into services with substantial fixed costs, certificate of need (CON) regulation has been viewed as a means of combating fears of a “medical arms race”, in which hospital markets would experience excess capacity and increased costs due to non-price competition between providers. Further, a common view in the health economics literature has been that there is a positive relationship between a surgeon’s volume (in aggregate or at a specific hospital) and his or her outcomes. If this is the case, entry limitations may improve quality to the extent they increase the volume per surgeon at a specific hospital.
We develop a model suggesting a different view of the role of entry on firm level competition. Instead of identical surgeons, our model is based on a distribution of surgeon quality both generally and at a firm-specific level. In this setting, hospital competition on the basis of both quality and quantity theoretically could be welfare enhancing without increasing quantity supplied. This would occur if free entry changes the contracting between hospitals and surgeons possessing heterogeneous levels of skill so as to create a more efficient distribution of surgeon skill across hospitals.
We provide empirical tests of the model using data from Pennsylvania for coronary artery bypass grafts (CABG) procedures performed between 1993 and 2003, both before and after the lifting of the statewide CON law in 1996. One critique of CON repeal is that it might encourage more surgeons to split their time across multiple hospitals, thereby reducing the benefits of hospital-specific volume-outcome effects. We find that, during the CON period in Pennsylvania, splitting appears to reduce surgeon performance. In the post-CON period, however, volume-outcome effects remain but are no longer firm specific, suggesting that splitting time between hospitals was not detrimental to outcomes. Specifically, the repeal of CON encouraged hospitals to compete more aggressively for higher quality surgeons; these high-quality surgeons accordingly split their time across institutions without reductions in performance. We are also able to test whether entry induced demand and find that entry was not associated with increases in CABG volume at a market level. In total, we find that the repeal of CON in Pennsylvania improved welfare without increasing the quantity of surgeries performed.
