The impact of agglomeration economies

on hospital input prices

Andrew I. Friedson and Jing Li

By Guillermo Rodriguez and Alain Jacks

Healthcare resources are limited and represent a big part of the United States GDP.

In this study, Andrew I. Friedson and Jing Li study the impact of agglomeration economies

on hospital input prices, specifically intermediate services like the cost of producing

laboratory tests. According to their study, they believe that agglomerating the health care

services, there can be a cost reduction by two different sources: competition and

specialization. Their cost-savings hypothesis is based not only on health care practices, but

also on agglomeration studies related to the spillover effect. According to the

agglomeration studies, here are three different ways to benefit from given agglomerations:

knowledge spillovers, labor market pooling, and input sharing. This study concentrated in

the input sharing, by attracting more intermediate service providers to the agglomeration of

the health care services.

The study introduced another variable in analyzing the cost efficiency of the

intermediate services when the health care service provider sizes where taken into

consideration. The fact that a bigger hospital has the capacity of creating an internal

economy of scale indicated that there was little contribution to bringing intermediate

service providers to reduce by competition, but increased the probability that there could
be a cost reduction by specialization, given that by hiring a more specialized team, cost

could decrease.

Another factor that affected the cost reduction was the cost of entry, because it

would directly affect the number of suppliers to achieve economic equilibrium in a

competitive economy. The cost of entry did not directly affect the price of the service but

affected the quantities for price equilibrium. Ultimately, there was also a policy impact

considering the licensing cost also part of the cost of entry, where a service provider had to

take into consideration before providing the service.

After analyzing the study, I believe this proposition should be considered before

taking a decision on expanding on a healthcare district or a healthcare service relocation.

Intermediate service providers should also consider this study when deciding on location

because it helps see where profits could be maximized (eg. using healthcare service

provider sizes, amounts of healthcare providers, etc.) and cost reduced. In different

economies, results are observed similarly because there are multiple ways an

agglomeration can benefit from being together.

In San Salvador, the capital city of El Salvador, there are four different healthcare

agglomerations. When one goes to the doctor or the hospital, the intermediate services are

provided by third parties, which make the costs “cheaper” and the process more efficient.

The only problem seen in this model is when there is a high cost of entry, being monetary or

political, because it greatest a quasi-monopoly controlled by few firms which end up

controlling the market prices and affecting the overall competitive environment. That is a

problem that can be solved with policy and regulation. But I believe in this study and have

seen it in first person.

In conclusion, there is reason to apply this study in the future structuring of the

healthcare system to allocate the assets correctly and have the most benefit out of it. There

is cost reduction, allocation efficiency, and job creation. It would also be a good idea to

study what would be the impact of having different sizes of agglomerations and finding the

most efficient size. That study would help find the best option when creating a healthcare

agglomeration and improving the service while reducing the costs, therefore the prices.
Article: https://healtheconomicsreview.biomedcentral.com/articles/10.1186/s13561-015-0075-1