Market Size and Trade in Medical Services

We uncover substantial interregional trade in medical services and investigate whether regional increasing returns explain it. In Medicare data, one-fifth of production involves a doctor treating a patient from another region. Larger regions produce greater quantity, quality, and variety of medical services, which they “export” to patients from elsewhere, especially smaller regions. We show that these patterns reflect scale economies: greater demand enables larger regions to improve quality, so they attract patients from elsewhere. Despite concerns about rural access, larger regions have higher marginal returns to spending. We study counterfactual policies that would lower travel costs rather than relocating production.