How Well Do Travel Cost Models Measure Competition Among Hospitals?

Posted by D. Daniel Sokol

Michael J. Doane, Competition Economics LLC Luke M. Froeb, Vanderbilt University - Owen Graduate School of Management and R. Lawrence Van Horn, Owen Graduate School of Management, Vanderbilt University ask How Well Do Travel Cost Models Measure Competition Among Hospitals?

ABSTRACT: Health plans create competition among hospitals by threatening to “steer” patients to preferred facilities. Mergers can reduce this competition and economists have begun using travel cost demand models to estimate their effects. In this paper, we document an anomaly in estimation: for any plausible estimate of the opportunity cost of time, the price of hospital service is several orders of magnitude larger than the estimated value that patients place on the service. This anomaly raises questions about how well travel cost models measure demand for medical care, competition among hospitals, and the increase in bargaining power created by merger.