Health Care Specialization and Asymmetric Competition: The Dynamics of Surgery Center and Hospital Exit

Presenter: Michael Housman, The Wharton School, University of Pennsylvania

Abstract

Rationale: The recent emergence and rapid growth of specialty hospitals and ambulatory surgery centers (ASCs) represent a growing trend towards specialization within the health care marketplace. In spite of the fact that ASCs are far more pervasive than specialty hospitals, we know much less about their competitive effect on hospitals. There are several management theories that develop the notion of asymmetric competition, which suggests that firm i exerts a different competitive pressure on firm j than firm j exerts on firm i. We apply these theories to the market for outpatient surgical procedures in order to explore whether ASCs and hospital compete with one another in fundamentally different ways.

Objectives: There are several reasons to believe that ASCs benefit from the presence of nearby hospitals. Hospitals tend to produce higher rates of procedure demand and attract a higher supply of physicians while allowing ASCs to cherry pick the most profitable procedures and the healthiest patients. For these same reasons, hospitals don’t necessarily benefit from the presence of competing ASCs. This phenomenon has implications for the ability of hospitals to treat vulnerable populations and cross-subsidize less profitable lines of service. To that end, this study aims to understand how ASCs influence market exit by general hospitals and how hospitals influence market exit by ASCs.

Methodology: We explored this relationship within the context of the market for outpatient surgery by using 1997 to 2006 patient data from the state of Florida. By manipulating these patient-level datasets to produce quarterly procedure counts at the county- and facility-level, we were able to measure competition, procedure demand, and firm entry/exit with exact precision and to directly model the relationship between them. We broke down our explanatory variables by facility type (ASC vs. hospital) and geographic location (local vs. diffuse), and utilized Cox proportional hazard models to evaluate the different impact of each factor on: (1) ASC exit; and (2) hospital exit.

Results: Although ASCs do tend to exit markets in which there are high levels of competition from other ASCs, we found only weak evidence to support the hypothesis that ASCs exit rates are lowest in markets with high hospital density. On the other hand, hospitals not only tend to exit markets with high levels of competition from other hospitals, but we also found evidence to support the hypothesis that they experience high exit rates in markets with high ASC density. These effects appear to be strongly influenced by geographic location.

Conclusions: Our results suggest that ASCs benefit from the presence of nearby hospitals while hospitals are hurt by the presence of competing ASCs. These findings have major implications since hospital closures may affect patient access to care. Moreover, competition with ASCs may prevent hospitals from treating vulnerable populations and cross-subsidizing less profitable lines of service (e.g., ER, mental illness). Additional research should assess the welfare implications of these findings and explore whether they apply to other specialized facilities entering the market for cardiac catheterization, lithotripsy, and diagnostic imaging services.