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Research Abstracts Online
January 2009 - March 2010

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University of Minnesota Twin Cities
School of Public Health
Division of Health Policy and Management

PI: Robert J. Town

Government Policy and the Dynamics of Market Structure: An Analysis of the Critical Access Hospital Program

This project seeks to understand the impact of the Medicare Rural Hospital Flexibility Program. The overarching goal of this legislation is to maintain access to quality hospital care for rural residents. To achieve this objective, the program created a new class of hospital, the Critical Access Hospital (CAH), to which rural hospitals can convert.
Like many other government policies, the CAH program targets the underlying supply infrastructure, in this case by providing generous cost-plus reimbursement to converting hospitals in exchange for capacity and service limitations.

This research specifies a dynamic oligopoly model of the rural hospital industry with hospital investment in capacity, exit, and conversion to CAH status. The researcher developed new methods that allow him to estimate the structural parameters efficiently and compute counterfactual equilibria. With these methods, the impact of eliminating and modifying the CAH program on access to hospitals and patient welfare is estimated. The methods may be more broadly useful in estimating and computing other dynamic oligopoly games with investment in capacity.