How Hospitals Practice Cost Containment with Selective Contracting and the Medicare Prospective Payment System

Presents a methodology for defining markets and setting standards in the context of hospitals and antitrusts. The methodology is based on the premise that the creation of dominant hospital markets in an area undermines the ability of selective contracting to constrain hospital price increases. Antitrust enforcements must follow a fine line between allowing organizations to combine insurance, physician, and hospital components, and enabling them to create the organizational capacity required to control costs and provide high quality of care. Entities that dominate the market have little reason to try to achieve these objectives. The authors argue that ultimately the factor that determines market performance is the range of choices the population has among competing insurance/hospital/physician combinations. The article concludes that because it is very difficult to reverse mergers once they occur, particular attention should be paid to preventing one organization from dominating an individual area, especially if a policy of managed competition is to succeed in reducing hospital costs.