Competition and Hospital Costs-Reply

In Reply.—  Our article addressed the effects of competition on hospital behavior in California following the introduction of selective contracting and the Medicare prospective payment system program. Drs Friedman and Bogue comment on the research reported in our article and on the merits of this type of research in informing policymakers. We will respond to each point in turn.As we understand their point, Drs Friedman and Bogue suggest that the observed cost reductions by hospitals in competitive markets reflect reduced demand rather than hospital competition. They note that increasing HMO enrollment and competition from ambulatorycare providers could be reducing demand for hospital services disproportionately in competitive areas, leading to the observed reductions in costs. Although such processes could account for reductions in total inpatient costs, they do not explain the significantly lower rate of increase in unit costs (both per day and per admission) that we observed in competitive