The effect of competition on reserve capacity: The case of California hospitals in the late 1990s.

This paper empirically investigates how competitive forces have affected bed capacity in the California hospital services industry using a data set for the late 1990s. The empirical results offer several conclusions about the effect of different types of competition on bed capacity during a period characterized by heightened price consciousness. In contrast to earlier periods, hospitals are found to continuously react to increased inter-hospital competition by reducing the supply of beds relative to patient demand. Similar to earlier periods, the empirical results suggest that increased physician/supplier competition leads to a reduction in bed capacity. Finally and in contrast to earlier studies, findings indicate that increased payer competition, as measured by the percentage of managed care patients in the market area, causes less bed capacity up to a point.