Is there a competitive market for hospital services?

This paper focuses on the price elasticity of hospital-specific demand curves. Each hospital is assumed to practice price discrimination with respect to Medicare, Medicaid, and other patients. Among the third group, patients covered by Blue Cross are analyzed separately from those who pay their own bills or are covered by commercial insurance or a health maintenance organization (HMO). We use two different methods to estimate the price elasticity of demand. First, a pricing rule is developed from which hospital-specific price elasticities may be inferred. Second, the distribution of each payer's admissions at specific hospitals is examined to determine if low-priced hospitals attract more patients. Data for the analysis are taken from 31 hospitals in the Minneapolis-St. Paul metropolitan area in 1981. Results of the first analytic method indicate that hospitals had monopoly power in their markets for Blue Cross and self pay/commercial insurance/HMO patients. These results are confirmed and extended to Medicare patients by the hospital demand analysis.