IESE Research Papers,
IESE Business School

Abstract: As health care costs increase, cost-control mechanisms become more widespread and it is crucial to understand their implications for the health care market. This paper examines the effect that managed care activity (based on the aim to control health care expenditure) has on the adoption of technologies by hospitals. Managed care may affect hospitals' decision to take on new technologies if it alters local market structure and physician incentives. We use a hazard rate model to investigate whether higher levels of managed care market share are associated with a decrease in medical technology adoption during the period 1982-1995. We analyze annual data on 5,390 US hospitals regarding the adoption of 13 different technologies. This is the first time that such a broad study has been implemented. After adjusting for hospital characteristics, demographics and local market characteristics, we find that managed care has a negative effect on hospitals' technology acquisition for each of the thirteen medical technologies in our study, and this effect is strongest for technologies diffusing in the 1990s, when the managed care sector was at its largest. If managed care enrollment had remained at its 1984 level, there would be 5.3, 7.3 and 4.1 percent more hospitals with diagnostic radiology, radiation therapy and cardiac technologies, respectively. We also take into account that cost-benefit analysis is one of the main dimensions considered by hospitals when deciding about the adoption of new technologies. In order to determine whether managed care affects technologies differently if they have a different cost-benefit ratio, we created a unique data set with information on the cost-benefit for each of the thirteen technologies. We find that managed care enrollment has a considerably more negative effect on the adoption of technologies with higher cost-benefit ratios. The results suggest there may be long-term reductions in medical cost growth resulting from increased managed care enrollment.

Keywords: technologu adoption; managed care; cost control; cost-benefit analysis; health care; hospital

44 pages, May 10, 2004

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