This paper analyzes the relationship between competition and hospital costs for the period between 1980 and 1985 for California hospitals, using multivariate regression techniques. Hospital market areas were defined by hospital service category using 1983 discharge data, hospitals competing for the patients in that market were identified, and the Hirschman-Herfindahl index was calculated as a measure of the competitiveness of the market. The findings indicate that the policies adopted in California in 1983 to foster competition have succeeded in bringing about reductions in hospital costs.
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