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Hospital Merger Benefits

By April 4, 2016Commentary

Hospital mergers over the last decade have created much greater concentration of market power horizontally and vertically in provider segments.  These mergers have been justified with a series of flimsy rationales, including providing better care and care integration and lowering costs by creating scale efficiencies.  A brief from PriceWaterhouseCooper suggests that the greater size has yet to should any benefits.     (PWC Paper)   The authors looked at Medicare data for 5600 individual hospitals and 526 systems.  They found that while larger individual hospitals have lower costs per admission, generally by reducing length of stay, health systems with multiple facilities do not.  In addition there seems to be no correlation between quality and cost or between quality and hospital size.

The authors suggest that there don’t appear to be scale benefits because most systems are run like holding companies, allowing too much autonomy to the component hospitals.  They estimate that if procedures were standardized and the operating model improved, costs could be lowered by 15% to 30%.  There is a far simpler explanation for what the data show:  when you are the only or one of a few systems in a geographic market, you have no incentive to either keep costs low or improve quality; you are going to get business no matter what.  And even if the systems did manage to lower their costs, it wouldn’t get passed on to payers since they have no countervailing market power to insist on those price reductions or where they do, they similarly are in an oligopolistic position and have no incentive to either lower their own prices or those of the providers they contract with.

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