How Do Hospitals Respond to Market Entry? Evidence from a Deregulated Market for Cardiac Revascularization.

Regulatory entry barriers to hospital service markets, namely Certificate of Need (CON) regulations, are enforced in many US states. Policy makers in other states are considering reinstating CON policies in tandem with service expansions mandated under the Affordable Care Act. Although previous studies examined the volume effects of CON, demand responses to actual entry into local hospital markets are not well understood. In this paper, we empirically examine the demand-augmenting, demand-redistribution, and risk-allocation effects of hospital entry by studying the cardiac revascularization markets in Pennsylvania, a state in which dynamic market entry occurred after repeal of CON in 1996. Results from interrupted time-series analyses indicate demand-augmenting effects for coronary artery bypass graft (CABG) and business-stealing effects for percutaneous coronary intervention (PCI) procedures: high entrant market share mitigated the declining incidence of CABG, but it had no significant effect on the rising trend in PCI use, among patients with coronary artery disease. We further find evidence that entry by new cardiac surgery centers tended to sort high-severity patients into the more invasive CABG procedure and low-severity patients into the less invasive PCI procedures. These findings underscore the importance of considering market-level strategic responses by hospitals when regulatory barriers are rescinded.