• R B Thomson.
• Pontifical Institute of Mediaeval Studies, Toronto, Ontario.
• Health Policy. 1994 Mar 1;27(3):205-31.

AbstractThe value added by acute-care hospitals is in the form of specific procedures (therapy, operations, testing) and the bed care necessary to make the procedures effective. When more than one hospital exists in a local area (defined in many studies as a radius of 15 mi/24 km) they compete for market share, since greater market share has a positive effect on economies of scale, utilization rates, learning curves and levels of quality. Competition is not only with other hospitals (and 75% of all hospitals do have a competitor within 24 km), but also with doctors who now perform some procedures in their offices, and with specialized clinics. The first strategy is to attract physician allegiance since they act as gate-keepers, directing patients to specific hospitals. This is done through personal amenities, professional amenities and enhancement to personal prestige and income. This competition for physician allegiance has a direct effect on utilization rates (doctors want spare capacity to suit their needs), on the range of services and facilities offered (doctors want more support), and on length of stay (doctors want longer stays). All of these increase the hospital's costs. The second strategy is to enter into contracts with third-party payers who will direct their clients to specific or preferred hospitals. The negative effect is that in competitive markets such payers may be able to bargain prices down. However, hospital differentiation makes it difficult for payers to make complete substitutions among them. As well, since the payers compete for clients, they often use hospital alliances as a selling point and therefore are often cooperative rather than confrontational in their negotiations. One tactic used by hospitals is to stress quality of service. But since quality in health care is hard to measure, patients are often unable to make direct assessments of alternatives. Hospitals therefore often 'signal' quality in various ways which may, and often do, increase hospital costs. (Some of these signals also attract physicians). Price is not a major element in competition. Most other strategies and tactics raise hospital costs and therefore price. Pressure from payers is turned back through differentiation (preventing substitution) and hospital-payer alliances for clients. Health care comes in too many packages to allow effective price competition. A final tactic is to increase the range of services or facilities offered. Enhanced services attract doctors by offering more support; attract some patients direct; and help to recapture market share lost to specialized clinics.(ABSTRACT TRUNCATED AT 400 WORDS)

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