Effect of Market Structure on Health Quality in the New Jersey Hospital Industry

This paper performs an empirical test of the effect of hospital market structure on health quality. In contrast with most literature that studies this relationship, this research recognizes that quality indexes based on mortality rates makes market structure endogenously determined. If a hospital’s entry decision is based on the actual market’s health quality, the estimated effect of competition on health quality could be biased. To correct this bias, this paper follows a two-step estimation procedure. In the first step, an entry model decision is estimated to construct a modification of the HirschmanHerfindahl index that is used as an instrumental variable. In the second step, an IV regression is used to test the effect of market structure on health quality.