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The Effects of Cross-Market Hospital Mergers

By April 11, 2016Commentary

There is no question at this point that hospital consolidation within geographic areas raises prices.  A research paper published at the National Bureau of Economic Research examines effects of cross-market hospital mergers.   (NBER Paper)   Authorities have focussed on consolidation within a geographic market because of the obvious effect on market share and potential bargaining power.  Less attention has been paid to cross-market consolidation because it was unclear how it might impact prices or other competitive factors.  The authors hypothesize that cross-market mergers could impact bargaining leverage and subsequent prices because both hospitals may be dealing with a common health plan, which offers services to employers, for example, who have workers in both markets.  In this scenario, the newly combined set of hospitals could use the employer’s or plan’s desire to have a specific hospital in one market to push contracts with the entire chain, or can use its presence in multiple markets to push for contracts with health plans trying to service employers whose workforce crosses markets.  The researchers compared price growth for hospitals that acquired a new hospital in the same state but not the same geographic market, referred to as an adjacent treatment area hospital, hospitals who acquired a new hospital out-of-state and hospitals not involved in a transaction; all over the period 1996 to 2010.  Price was constructed by using Medicare cost report data which gives total non-Medicare revenue and admissions; a somewhat imperfect price determining mechanism.

The researchers found that prices for adjacent treatment hospitals involved in mergers increased by 6% to 10% more than for the control group of hospitals not involved in consolidation activity.  Non-adjacent hospitals who merged did not show a similar pattern.  This makes sense, because the likelihood of a common health plan contract or a common employer customer is higher for adjacent treatment hospitals.  And the researchers further found that having a common health plan between the merging hospitals accounted for all of this price effect in regression analyses, which is consistent with the authors’ hypothesis on how cross-market mergers might affect prices.  This research suggests that policymakers and antitrust enforcers should carefully scrutinize even cross-market hospital mergers, particularly where the hospitals have common customers or common health plan relationships.

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