Managed Care and the Adoption of Hospital Technology: the Case of Cardiac Catheterization

Increasing health care costs in the United States, and the factors contributing to them, are strongly debated issues among academics and policy makers. Among these factors, technological change in medicine has been widely regarded as the primary driver of cost growth. However, one factor that has been largely ignored in the literature and ought to be considered an open question is the e ect of increased competition among HMOs on hospital competition. This paper di erentiates between two notions of the e ects of managed care on hospital technology: (i) HMOs discourage the adoption of technology by all hospitals, and (ii) HMOs rationalize the adoption of technology in hospitals. These notions are di erentiated by stating competing hypotheses regarding the e ect of HMO penetration and the e ect of HMO competition on a hospital's probability to adopt, as well as the time to the rst and follow-on adoptions in a given hospital market. Data from 1985-1995 on cardiac catheterization laboratories from all short term general community hospitals, and data on HMO penetration and competition, yield results consistent with the traditional medical arms race literature. Further, the results show that whereas HMO penetration does not e ect the probability of adoption, a hospital is more likely to adopt cardiac catheterization facilities as the competition within HMOs increases. The results also indicate that the probability of follow-on adoption in a local hospital market initially increases as the HMO market becomes increasingly competitive, but eventually starts decreasing. If the results reported here are typical of other expensive technologies as well, then it implies that as HMO competition increases, so does duplication of technology. This in turn can lead to a faster growth in the health care costs.