Background A variety of approaches have been used to contain escalating hospital costs. One approach is intensifying price competition. The increase in price based competition, which changes the incentives hospitals face, coupled with the fact that consumers can more easily evaluate the quality of hotel services compared with the quality of clinical care, may lead hospitals to allocate more resources into hotel rather than clinical services.

      Methods
      To test this hypothesis we studied hospitals in California in 1982 and 1989, comparing resource allocations prior to and following selective contracting, a period during which the focus of competition changed from quality to price. We estimated the relationship between clinical outcomes, measured as risk-adjusted-mortality rates, and resources.


      Results
      In 1989, higher competition was associated with lower clinical expenditures levels compared with 1982. The trend was stronger for non-profit hospitals. Lower clinical resource use was associated with worse risk adjusted mortality outcomes.


      Conclusions
      This study raises concerns that cost reductions may be associated with increased mortality.