Cost Reductions Following Hospital Mergers

By May 8, 2017Commentary

Hospitals have attempted to justify their incessant coupling by claiming that costs will be reduced and quality improved.  A study carried in the Journal of Health Economics examines the first justification.   (JHE Article)   Between 2000 and now there have been 1000 hospital mergers.  Research amply shows the price-increasing effect of these mergers.  On its face that might suggest that costs of doing business for the merged hospitals actually went up.  The authors used data from mergers occurring between 2000 and 2010, linked with cost data hospitals file with CMS, to evaluate cost of doing business trends for hospitals involved in mergers versus those not involved in such activity.  Before a merger, the two groups of hospitals show a common cost trend.  Following a merger, the acquired hospital appears to have cost reductions of 4% to 7% on average.  These cost reductions don’t seem to result from things like changes in patient or service mix, but to reflect real efficiencies or cost of doing business reductions.  In a sub-analysis, however, it appears that the cost reductions occurred when a multi-hospital system acquired other hospitals, but not when one hospital acquires another.  Multi-hospital systems may have more sophistication at creating efficiencies or simply more scale to leverage buying power.  Interestingly, especially from a competitive analysis perspective, same-market mergers do not appear to generate cost savings, whereas mergers of hospitals in different markets do.  This undercuts the notion that consumers might benefit from cost savings from same-market hospital mergers.

Other work on hospital consolidation has underscored a complex dynamic at work in same-market hospital mergers.  No matter what the hospitals say, these are driven almost exclusively by a desire to enhance bargaining power with private health insurance plans; i.e., to raise prices.  And they usually accomplish that aim.  Even if they did reduce costs of doing business for the hospitals, the hospitals have no intention of sharing those savings by lowering prices, quite the opposite.  Since they have no intention of lowering prices, and many of these hospitals are shamefully denoted as non-profit, while in fact making obscene profits, they have no incentive to and do not cut costs.  On the contrary, they tend to raise cost, spending on marketing and advertising, building fancy facilities, paying administrators multi-million dollar compensation packages, etc.  No one may be listening, but I will keep saying we need to not only allow no more in-market mergers, we need to break up the ones that have occurred.

Kevin Roche

Author Kevin Roche

The Healthy Skeptic is a website about the health care system, and is written by Kevin Roche, who has many years of experience working in the health industry through Roche Consulting, LLC. Mr. Roche is available to assist health care companies through consulting arrangements and may be reached at khroche@healthy-skeptic.com.

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