Competition and the Cost of Hospital Care-Reply

In Reply.—  Airplanes without wings sometimes do fly—witness the helicopter. Unfortunately, Mr Weller's view of economics is as limited as his view of aircraft: if something does not fit the classic model it doesn't exist.It is certainly the case that price competition dominates nonprice competition in classic markets with identical goods made by many firms and purchased directly by many consumers. Furthermore, in such price-competitive industries, areas with more competitors tend to have lower costs than areas with local monopolies. However, it is our contention that, at least through 1982, price competition among hospitals was rare and nonprice competition was dominant. Therefore, our findings should not be as surprising nor seem as wrongheaded as Mr Weller argues.The introduction of new payment schemes such as Medicare's prospective payment system and the growth of health maintenance organizations, preferred provider organizations, and other agencies that may selectively contract with hospitals may