Cost Savings from Hospital Mergers

By August 24, 2018 Commentary

A lot of lame justifications are used for hospital consolidation, most of which have found no support in research.  One benefit that you would think would occur is an ability to lower operating costs, such as on purchased goods or services.  But a paper published at the National Bureau of Economic Research finds little that is encouraging even in this area.    (NBER Paper)   The researchers used data from 2009 to 2015 on horizontal hospital mergers and the effect of such mergers on what was spent on physician preference items, like artificial joints, stents, etc., and other supply items, but all related to medical care.  More general purchased supplies and services, like trash removal, copying supplies and services, transcription, etc., were not included but are an equally important portion of total hospital costs.  The data source was the ECRI Institute’s PriceGuide, which has information from 1200 hospitals based on actual purchase orders for the medical care-related supplies.  All told, these supply items represented about 23% of a hospital’s total costs of being in business.   The researchers tried to identify which categories might be the source of savings for both the acquired and the acquiring hospital and attempted to analyze whether there were market or other factors which influenced savings.  About 80 merger transactions were analyzed for effects on spending and compared with around 436 control hospitals’ spending patterns.  One interesting side note is that the analysis revealed very wide variation in prices paid by hospitals for the same item.

The bottom line finding of the paper is that the average acquired hospital might save $176,000 per year on the top 47 supply categories and the acquiring hospital saves nothing.  Within categories, the acquired hospitals saw a 2.6% average reduction in physician preference item spending, all due to negotiating lower prices on specific items, not to switching suppliers.  This effect was greatest for smaller, local mergers.  This reduction was partly offset by actual increases in spending for other medical supply categories.  In regard to less expensive, more commodity supplies, the savings were 6.4% for acquiring hospitals, but they actually paid more for physician preference items which more than offset the savings from the commodity supplies.  The PPI savings were greatest for in-market mergers, where both the acquired and acquiring hospitals are in the same market, and the commodity savings were greatest for out-of-market mergers.  These total savings are in any event pretty paltry.  And of course, even if the merging hospitals did manage to extract cost savings, that isn’t going to end up benefiting the public in the form of lower prices–in fact prices for hospital services inevitably rise after consolidation.  One reason hospitals probably don’t feel much pressure to get cost savings is that they don’t feel any need to reduce prices for their services.  Just one more debunked so-called benefit from hospital consolidation.

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