A relational approach to measuring competition among hospitals.

Competition has been a key concept in the market-oriented U.S. health care system in the last 2 decades. Despite its critical importance, many researchers are not satisfied with the existing methods of measuring competition (Bernstein and Gauthier 1998; Gaynor and Haas-Wilson 1999). One reason for such dissatisfaction is that existing methods often fail to capture fine-grained variations in competition in the local market. Most existing methods, following the structural tradition of Stigler and Sherwin (1985), conceptualize competition as an attribute of the market. Even methods that are designed to measure hospital-level competition first define the market for a hospital and then measure competition based on the market so defined (Luft and Maerki 1984/1985; Zwanziger, Melnick, and Mann 1990). Because of their desire to define all-encompassing, autarkic markets, economists tend to prefer using large geographic areas as markets (see Arnould and DeBrock 1986; Morrisey, Sloan, and Valvona 1989). Because of the market focus and the use of large markets, existing methods cannot adequately describe the microcompetitive behavior among hospitals in the local market. With the advent of managed care, however, the importance of local markets is increasing because of the way selective contracting can pit hospitals against one another (Zwanziger, Melnick, and Eyre 1994). As managed care markets mature and hospitals increasingly pay more attention to their immediate neighbors, a new method is called for that is better suited to this changing market context and measures local variations in competition. The relational approach introduced in this article conceptualizes competition as an attribute of a relationship between two hospitals and measures competition at the level of each pair of hospitals, the smallest unit at which competition can be measured. To some, competition is characterized more by the absence rather than presence of any formal or informal relationships (as illustrated by the phrase “arm's-length ties”). Thus, competition as a relationship may sound like a contradiction in terms. Although hidden and not directly observable, competition “exists” as negative influence that competitors exert on one another, and it can be measured by using observable indicators such as price or patient flow. Niche overlap theory in organizational analysis provides a theoretical framework for constructing the relational measure of competition. Because all organizations must rely on their environment for critical resources to sustain themselves (Scott 1998), they need to compete for the resources to survive and thrive under the usual conditions of resource scarcity and mutual exclusion (Hannan and Freeman 1989). The theory states that two organizations compete to the extent that they rely on the same resources and that the amount of overlap in resource niches between two hospitals is directly proportional to the amount of competition between them (Baum and Haveman 1997). More formally, then, the relational approach consists of measuring competition between two hospitals using the extent of overlap in their use of common resources. The relational approach can enrich the study of competition on many different levels of analysis. First, it can be used to identify the strongest competitor. This allows researchers to model the effect of the strongest competitor in many areas of health services research. It is not yet well known how important the strongest competitor is in explaining various hospital behaviors. However, there is no denying that the strongest competitor is the most salient part of a hospital's environment, and as such, its market behavior must be closely monitored and taken into account in some way or another. Its importance may vary depending on the market context; in more locally oriented markets such as those in rural areas, the strongest competitor may assume much more importance than in large and diffuse markets. On the other hand, hospitals in markets dominated by fee-for-service patients may find the strongest competitor less constraining than in those dominated by managed care in which HMOs and PPOs can play hospitals against their strongest competitors to obtain deeper discounts. One can thus imagine that the strongest competitor may gain more significance as managed care markets mature. Not only does the relational method allow one to identify the strongest competitor, but it also allows one to estimate the strength of competition received from it. In fact, the relational approach can be used to obtain a complete ranked list of competitors by their strength of competition. One can measure how much competitive pressure a hospital receives from its local market competitors such as the first two, three, five, or ten strongest competitors. Furthermore, the sum of competitive pressures from all hospitals can be an indicator of the total competitive pressure a hospital is under. Pair-wise competition can be used to detect local market structures and to delineate larger groups such as markets or organizational populations (see Van de Ven and Ferry 1980). Using the relational measures, Sohn (1996) detected different structures such as clique, center-periphery, enclave, and diffuse structures formed by a focal hospital and its ten strongest competitors. Because the clique in which all hospitals compete intensely with all others would be a much harsher environment than the other three structures, one would hypothesize that competition has the strongest effect on hospitals in a clique. An enclave in which the focal hospital is not competing with any others in the group but all the others compete intensely with one another would be a market structure that will accord monopolistic benefits to the focal hospital even though it is surrounded by others in such a way that a casual observer finds it involved in the heat of competition. These three do not exhaust the range of possibilities by any means. However, they illustrate how the relational approach provides opportunities to researchers in measuring competition on different units of observations and how it can be used to obtain new indicators of competition that may bring additional light to what is already known about the functioning of health care markets. In addition, the relational approach can be used effectively in analyzing the increasingly complicated health care markets in which many hospitals join larger units such as health systems, networks, and alliances. In such an environment, a method focused solely on hospitals may not be attractive enough. Even though this article considers competition only among hospitals, the method can be applied to a more diverse group of providers if appropriate mechanism and indicators of competition can be specified and data are found.1