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  • Competition and Complementary Activities: Lessons from

    Radiological Diagnosis and Treatment

    Justin Lenzo ∗

    September 2010

    1 Introduction

    We consider in this work how competition among hospitals affects their positioning decisions across the complementary, technologically intensive activities of diagnostic radiology and and radiation therapy. We view a hospital as jointly deciding whether to position itself on the tech- nological frontier of each field. The objective of our analysis is to characterize the manner in which these two positioning decisions interact both with each other and with the positioning decisions of rival hospitals. Is frontier positioning in diagnosis substitutable or complementary with frontier positioning in treatment? Are a hospital’s positioning decisions strategically sub- stitutable or strategically complementary with those of rivals? As we will discuss, the context of hospitals exhibits a number of departures from standard competitive models that inhibit definite predictions on these interactions. Our approach is therefore to let the data speak for itself and use our estimates of these interactions to learn something about how hospitals compete in these service areas.

    We identify a set of frontier technologies in each field and examine how tendency toward joint adoption varies with market-level effects, hospital characteristics, and beliefs about rival positioning strategy. We employ a modified bivariate probit specification that allows us to es- timate payoff interactions separately from correlation in unobserved hospital preferences across the two fields. We handle the endogeneity of rival behavior using the Nested-Pseudo Likelihood approach developed by Aguirregabiria (2004) and Aguirregabiria and Mira (2007). Our prelimi- nary results suggest complementarity does exist between the two services, that it is stronger for teaching hospitals, that hospitals are more threatened by rivalry in diagnostics than by rivalry in treatment, and that hospital systems coordinate more in the provision of frontier treatment services than in frontier diagnostics.

    ∗Department of Management and Strategy, Kellogg School of Management, Northwestern University, e-mail: j-lenzo@northwestern.edu

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  • Diagnostic imaging has been the subject of several studies of hospital behavior, including Trajtenberg (1989), Baker (2001), and Schmidt-Dengler (2006). Trajtenberg (1989) examines the market for computed tomography (CT) scanners and estimates welfare gains that stem from innovation. Baker (2001) studies the timing of magnetic resonance imaging (MRI) by hospitals, with a focus on the role of HMO penetration in the hospital’s market. Schmidt-Dengler (2006) also studies MRI, but focuses on strategic factors stemming from the oligopoly structure of most hospital markets. Radiotherapy has not seen quite the attention from economists.

    In a previous paper, Lenzo (2008) studies the interaction between hospital decisions to adopt two substitutable nuclear medicine diagnostic imaging machines: single-photon emission tomog- raphy (SPECT) and positron emission tomography (PET). That paper shares with the present work an emphasis on how competition among hospitals may drive changes in complementarity. However, with SPECT and PET, two imperfectly substitutable technologies for patients and physicians, the complementarity is driven largely by economies of scope. Competition has the effect of diminishing the self-cannibalization in revenues that a hospital faces when adopting both machines, and thereby increases the degree to which the technologies are complements in profits.

    In contrast, we are investigating complementary services here. Given that diagnostic radiol- ogy and radiation therapy are distinct departments within the hospital that manage their own services and equipment, and given that supply-sides of the respective markets are disjoint, there does not appear to be substantial sources of economies of scope. Complementarity is instead driven driven by revenue considerations or indirect benefits of “technological excellence,” such as attractiveness to physicians. If there are patients (or referring physicians) that are sensitive to the additional quality that the frontier technologies provide, and if preferences for high-tech medical services correlate positively across diagnostics and therapy, then a hospital positioned on the frontier in one sector should be able to attract these patients away from rival hospitals that have only conventional varieties.

    We should note that the flow of patients between diagnosis and treatment goes in both directions. While diagnostics may be the entry point to the feedback loop between the two services, the need for follow-up scans to discern whether treatment was effective ensures that a patient travels back and forth between the two, potentially several times. This bidirectional flow of patients between these services undergirds a feedback loop in payoffs to their provision. A hospital positioned on the frontier in one service may attract patients or physicians who are sensitive to the added quality of the frontier technology. However, if consumer (patient or physician) preferences are strongly correlated, then a rival can attract these consumers away from the hospital by positioning on the frontier of both services.

    The remainder of this paper proceeds as follows. We discuss the technological services under study and provide intuition for how they may interact in Section 2. We describe the econometric specification in Section 3 and the data used to estimate it in Section 4. Then we present some

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  • preliminary results in Section 5. Please note that this version of the paper is preliminary and incomplete.

    2 Diagnostic Radiology and Radiation Therapy

    A relevant patient typically starts a diagnostic-treatment process by undergoing one or more scans conducted by the diagnostic radiology provider. If a malady is detected, the patient is then sent to either radiation therapy or an alternative treatment service. If the patient undergoes radiation therapy, then the patient is invariably sent for one or more follow-up diagnostic scans, possibly iterating through diagnosis and treatment several times until the process terminates.

    Most hospitals can provide a basic level of both diagnostic and treatment service for cancer patients. On the diagnostic side, nearly all observed hospitals in 2006 had conventional scanning technologies like CT, ultrasound, and film mammography, and most hospitals provided MRI service either in-house or through an external partner. On the treatment side, conventional radiotherapy technologies or substitutes such as chemotherapy were provided by two-thirds of observed hospitals.

    2.1 Frontier Technologies in Radiology and Radiotherapy in 2006

    A hospital differentiates itself in diagnostic radiology or radiation therapy service by adopting one or more of the frontier technologies of each field. In 2006, the frontier diagnostic technolo- gies were multi-slice computed tomography (MSCT) with at least a 64-slice scanner, positron emission tomography with computed tomography (PET/CT), or full-field digital mammogra- phy (FFDM). The frontier treatment technologies are shaped-beam radiation therapy (BEAM), intensity-modulated radiation therapy (IMRT), or image-guided radiation therapy (IGRT).1 All six technologies were introduced to the market after 2000 and the AHA started recording the presence of each facility within two years prior to the sample.

    One can think of each of the three technologies on the diagnostic frontier as the latest gen- eration of a diagnostic subspecialty. Multi-slice CT follows a long lineage of X-ray and CT scanners, machines that shoot beams of radiation through the patient and capture an image on the patient’s opposite side.2 PET/CT, on the other hand, falls under the nuclear medicine umbrella, where radioactive material is injected into the patient and the machine’s camera mea- sures emissions from the material’s decay. One should note that PET/CT also represents a trend toward hybridization of diagnostic imaging in that it combines a conventional CT scanner and a PET scanner into a single machine. Both MSCT and PET/CT are general-purpose diagnostic

    1The abbreviations MSCT, PET/CT, FFDM, IMRT, and IGRT are all standard in the industry and academic literature on these technologies. There is no such standard abbreviation for shaped-beam radiation therapy, so the author has chosen that used in the AHA Survey data. One should note that SBRT, often discussed alongside IMRT and IGRT, stands for “stereotactic body radiotherapy,” a somewhat different treatment technology from shaped-beam RT and one that is not included in the AHA survey.

    2Information on MSCT and PET/CT is taken from Busse (2006).

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  • imaging technologies applied across a number of specialties including oncology, cardiology, and neurology. FFDM, on the other hand, was the latest in mammography machines, and hence has specialized application to breast cancer diagnosis. However, breast cancer is of sufficiently high incidence that it constitutes a significant portion of radiation therapy applications (American Cancer Society, 2005).

    All three of the treatment technologies have applications in the treatment several different types of cancer. As the name suggests, IGRT uses imaging technology in the course of radiation delivery. Automated image-guided delivery of radiation allows for higher precision in where the radiation hits. One should note that since IGRT facilities use only conventional imaging tech- nologies (mainly CT), the bundling of imaging and treatment with this service is not a direct sourc