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The Effect of Price Shopping in Medical Markets: Hospital Responses to PPOs in California


  • Jonathan Gruber


The last ten years have seen the introduction of price shopping into medical markets which were previously dominated by price insensitive consumers. Price shopping has been facilitated by the advent of the Preferred Provider Organization (PPO), which coordinates the demand of a large number of individual health care buyers, thereby gaining market rower which it uses to obtain Sleep discounts off list prices from providers. I study hospital responses to the advent of price competition in California over the 1984-1988 period. I note that, due to the nature of hospital bargaining with PPOs, hospitals should face more competitive pressure in hospital markets that arc more competitive ex-ante. This hypothesis is supported by the fact that hospital net prices declined in more ex-ante competitive areas in California after the arrival of PPOs. Hospital average costs did not decline in more competitive areas, however, indicating that there was a reduction in hospital markups. Care to the uninsured by hospitals. which is financed out of markups, fell substantially as competitive pressure grew; there was a 50 cent reduction in uncompensated care for every one dollar rise in discounts to private payers.

Suggested Citation

  • Jonathan Gruber, 1992. "The Effect of Price Shopping in Medical Markets: Hospital Responses to PPOs in California," NBER Working Papers 4190, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:4190
    Note: HC PE

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    References listed on IDEAS

    1. Thorpe, Kenneth E & Phelps, Charles E, 1991. "The Social Role of Not-for-Profit Organizations: Hospital Provision of Charity Care," Economic Inquiry, Western Economic Association International, vol. 29(3), pages 472-484, July.
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    3. Noether, Monica, 1988. "Competition among hospitals," Journal of Health Economics, Elsevier, vol. 7(3), pages 259-284, September.
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    7. Zwanziger, Jack & Melnick, Glenn A., 1988. "The effects of hospital competition and the Medicare PPS program on hospital cost behavior in California," Journal of Health Economics, Elsevier, vol. 7(4), pages 301-320, December.
    8. Dranove, David & Shanley, Mark & White, William D, 1993. "Price and Concentration in Hospital Markets: The Switch from Patient-Driven to Payer-Driven Competition," Journal of Law and Economics, University of Chicago Press, vol. 36(1), pages 179-204, April.
    9. Weisbrod, Burton A, 1991. "The Health Care Quadrilemma: An Essay on Technological Change, Insurance, Quality of Care, and Cost Containment," Journal of Economic Literature, American Economic Association, vol. 29(2), pages 523-552, June.
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    Cited by:

    1. Burgess, Simon & Propper, Carol & Wilson, Deborah, 2005. "Extending Choice In English Health Care: The implications of the economic evidence," CEPR Discussion Papers 5328, C.E.P.R. Discussion Papers.
    2. Martin Gaynor & Deborah Haas-Wilson, 1999. "Change, Consolidation, and Competition in Health Care Markets," Journal of Economic Perspectives, American Economic Association, vol. 13(1), pages 141-164, Winter.
    3. Gaynor, Martin & Vogt, William B., 2000. "Antitrust and competition in health care markets," Handbook of Health Economics,in: A. J. Culyer & J. P. Newhouse (ed.), Handbook of Health Economics, edition 1, volume 1, chapter 27, pages 1405-1487 Elsevier.
    4. Daniel P. Kessler & Mark B. McClellan, 1999. "Is Hospital Competition Socially Wasteful?," NBER Working Papers 7266, National Bureau of Economic Research, Inc.
    5. Propper, Carol & Wilson, Deborah & Soderlund, Neil, 1998. "The effects of regulation and competition in the NHS internal market: the case of general practice fundholder prices," Journal of Health Economics, Elsevier, vol. 17(6), pages 645-673, December.
    6. Daniel Kessler & Mark McClellan, 1999. "Designing Hospital Antitrust Policy to Promote Social Welfare," NBER Working Papers 6897, National Bureau of Economic Research, Inc.
    7. Mark G. Duggan, 2000. "Hospital Ownership and Public Medical Spending," The Quarterly Journal of Economics, Oxford University Press, vol. 115(4), pages 1343-1373.
    8. Propper, Carol, 1996. "Market structure and prices: The responses of hospitals in the UK National Health Service to competition," Journal of Public Economics, Elsevier, vol. 61(3), pages 307-335, September.

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