Do Physicians Possess Market Power?

We study the degree to which greater physician concentration leads to higher service prices charged by physicians in the commercially insured medical-care market. Using a database of physicians throughout the entire United States, we construct physician-firm concentration measures based on market boundaries defined by fixed driving times—we label the“fixed-travel-time HHI” (FTHHI). Similar to the measure constructed by Kessler and McClellan [2000], the FTHHI is constructed to mitigate omitted-variable bias attributable to higher quality physicians attracting a higher share of patients. We link these concentration measures to health insurance claims. We find that physicians in more concentrated markets charge higher service prices. Cross-sectional estimates show that a ten percent increase in concentration is associated with a 0.5 to 1 percent increase in fees. Panel estimates show the effect may be twice as large, although estimates are less precisely estimated. Our estimates imply that physician consolidation has caused about an eight percent increase in fees over the last 20 years.