NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Did the HMO Revolution Cause Hospital Consolidation?

Robert Town, Douglas Wholey, Roger Feldman, Lawton R. Burns

NBER Working Paper No. 11087*
Issued in January 2005
NBER Program(s):   HC    IO

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During the 1990s US healthcare markets underwent a significant transformation. Managed care rose to become the dominant form of insurance in the private sector. Also, a wave of hospital consolidation occurred. In 1990, the mean population-weighted hospital Herfindahl-Hirschman Index (HHI) in a Health Services Area (HSA) was .19. By 2000, the HHI had risen to .26. This paper explores whether the rise in managed care caused the increase in hospital concentration. We use an instrumental variables approach with 10-year differences to identify the relationship between managed care penetration and hospital consolidation. Our results strongly imply that the rise of managed care did not cause the hospital consolidation wave. This finding is robust to a number of different specifications.

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