Government policy and the dynamics of market structure: Evidence from Critical Access Hospitals
This paper seeks to understand the impact of the Medicare Rural Hospital Flexibility Program (Flex). The goal of this program is to maintain access to hospital care for rural residents. Like many other government policies, the Flex program targets the underlying supply infrastructure, in this case by providing more generous cost-plus reimbursement to rural hospitals in exchange for capacity and service limitations. The program created a new class of hospital, the Critical Access Hospital (CAH), to which rural hospitals can convert. We specify a dynamic oligopoly model of the rural hospital industry with hospital investment in capacity, exit and conversion to CAH status. We develop new methods that allow us to efficiently estimate the structural parameters and compute counterfactual equilibria. We use the methods to estimate the impact of eliminating and modifying the Flex program on access to hospitals and patient welfare. We find that without the Flex program 5% of currently operating hospitals would have closed. Our methods may be more broadly useful in estimating and computing other dynamic oligopoly games with investment in capacity.