Does Advertising Expand the Market for Hospital Services? Evidence from Medicare

Direct-to-consumer advertising is pervasive in US healthcare markets, but little evidence exists on the effects of advertising by hospitals, second only to drug manufacturers in medical marketing. Advertising may help facilities increase market share by stealing existing patients, expand the market for hospital care, or do both. Regardless, it has important public finance implications due to the large sums of taxpayer funds spent by federal and state governments to subsidize hospital operations and finance care through public insurance programs. This paper provides the first causal evidence, to our knowledge, on the market expansion effects of hospital advertising. To obtain causal estimates, we leverage the fact that spikes in political advertising significantly crowd out hospital advertising in the same market, motivating an instrumental variables design. Using claims data on the universe of Traditional Medicare beneficiaries, we find that advertising expands aggregate patient volume and spending on inpatient care – though to a modest degree (implied elasticities of 0.06 and 0.05, respectively). Although the overall effect of advertising on hospital outpatient care is muted, for-profit hospitals obtain higher outpatient Medicare volume and revenue with greater advertising. Across both care settings, therefore, Medicare spending increases with hospital advertising.