The Impact of Agglomeration Economies on Hospital Input Prices

This paper examines the extent to which agglomeration of the hospital service industry enhances
the productivity of producing health care. Specifically, we use a large set of private insurance
claims from the FAIR Health database to show that an increasing spatial concentration of
hospital services results in a decreased cost of obtaining intermediate medical services. We
explicitly test whether the reduced cost at concentrated locations arises from the ability to share
intermediate service providers. The identification relies on state variation in medical lab
technician licensure requirements, which influence the cost of intermediate services only through
the cost of running a lab. Our findings suggest that agglomeration of the hospital service
industry attracts specialized medical labs, which in turn help to reduce the cost of producing
laboratory tests.