Dynamic Equilibrium in the Hospital Industry

Abstract

We present a dynamic model of the hospital industry in which nonprofit and for-profit hospitals coexist and compete and are differentiated by their objective functions, investment technologies, and taxation rates. In our model, patients differ by income and type of insurance coverage, and choose admission to their preferred hospital, while hospitals choose investment, entry, exit, and pricing strategies. We estimate the parameters of the model with aggregate data and a GMM procedure. We then use the model to examine the effects of changes in the Medicare reimbursement system, universal health-care coverage, and taxation of nonprofits.

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