Government policy and the dynamics of market structure: Evidence from Critical Access Hospitals

Many government policies either target the underlying supply infrastructure or have indirect effects on market structure. In this paper we seek to understand the impact of the Critical Access Hospital (CAH) program on the U.S. rural hospital infrastructure and societal welfare. This program provides generous reimbursement to hospitals in exchange for size and service limitations. We specify and estimate a model of the rural hospital industry in which hospitals choose investment, exit, prices and conversion to CAH status. Because these choices have dynamic impacts and even rural hospitals have geographically close competitors, we model hospitals as a dynamic oligopoly. We estimate the structural parameters from this model using a two-step inference method and assess the structural and welfare impacts of the CAH program. Our methods extend current estimation techniques for dynamic oligopoly models to allow for investment behaviors that are more consistent with the data. Our estimated parameters on investment costs and the costs of CAH conversion appear reasonable in magnitude. Preliminary results reveal that the CAH program increases the profits of converting hospitals by $260,000 and decreases exits by 5%.