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Abstract
PPOs and HMOs have gained widespread acceptance due in part to the belief that excess
capacity and competitive market conditions can be leveraged to negotiate lower prices
with health care providers. We investigated prices obtained in different types of
markets by the largest PPO in California. Our findings indicate that greater hospital
competition leads to lower prices. Furthermore, as the importance of a hospital to
the PPO in an area increases, the price rises substantially. Our testing of alternative
methods for defining hospital geographic markets reveals that the common practice
of using counties to define the market leads to an underestimate of the price-increasing
effects of a merger.