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Another Study Links Hospital Mergers to Higher Prices

By John Commins  
   March 28, 2016

Researchers find that "cross-market mergers in the same state result in price increases of roughly 6% to 10%, while those linking hospitals to out-of-state providers do not result in statistically meaningful changes in price.

A study out this month from researchers at Northwestern University's Kellogg School of Management provides a link between "cross-market" hospital mergers and higher prices for healthcare.

Specifically, researchers examining more than 500 hospital mergers from 2002 to 2012 found "cross-market mergers in the same state result in price increases of roughly 6% to 10%, while those linking hospitals to out-of-state providers do not result in statistically meaningful changes in price. Further analyses provide suggestive evidence that mergers of proximate hospitals (i.e. within 30−90 minutes' drive, in state) lead to the largest price effects."

Study lead author Leemore Dafny, director of Kellogg's Health Enterprise Management (HEMA) program, spoke with HealthLeaders Media about the study. The following is an edited transcript.

HLM: What prompted this study?

Dafny: There were consistent anecdotal reports of increases in system size and in geographic span of those systems. I wanted to document that path and also to try better to understand the implications.

HLM: How do you define "cross-market mergers?"

Dafny: It is the combination of organizations that operate in distinct service markets for patients. That could be distinct geographic markets, but it could also be different product lines. The paper has two components. One is a theoretical section and the other is an empirical section. The theory applies to cross markets, which isn't just across geographies, but across different patient and user markets.

The empirical path pertains to the combinations across geographic markets. The same kind of theory could apply if you had a pediatric hospital merging with a general acute care hospital, or even if you had a large cardiology group merging with a large orthopedic group.

HLM: How are these cross-market mergers distinct from within market mergers?

Dafny: Within market, which is also called a horizontal combination, would be when two providers are competing to provide the same service for the same set of patients, which typically will have a geographic component as well as product line.

HLM: What percentage of hospital mergers are cross-market?

Dafny: Using the data from my study, which spans 2000 to 2012, we saw slightly more cross-market than within-market combinations. I'm not sure what the last three years of data would tell you. I haven't had access to it.

HLM: It appears that within-market mergers get all the antitrust scrutiny.

Dafny: It's accurate to say that it has gotten all the antitrust enforcer attention. The theory and the empirical evidence on within-market combinations tending to lead to price increases without commensurate quality improvements is very robust.

The authorities have a series of successful enforcement efforts beneath their belts. With cross markets, this is one of the first stabs at that question, not just in quantifying it empirically, but in actually developing theoretical pathways that could enable authorities to challenge these transactions.

HLM: Is it accurate to say that the biggest factor driving these price increases is that these combined provider entities have more leverage with insurers?

Dafny: The answer is yes. It appears that these combinations within states enable price increases that we don't document for out-of-state transactions. To the extent that system acquisition is doing something different to change a hospital's operations, we don't have any reason to think that those affects should be different across states but for bargaining power.  

HLM: Are you surprised by your findings?

Dafny: The study confirms what many in the industry have long known, and yet it has escaped the scrutiny of antitrust enforcers, and of many hospital boards that may not fully appreciate the ramifications of these transactions.

I wouldn't say this is the newest thing under the sun, but actually it is pretty novel in antitrust enforcement circles and now having some information out there will cause a lot of C-suite executives to ask tough questions and think hard about whether this sort of deal serves their communities best.

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John Commins is a content specialist and online news editor for HealthLeaders, a Simplify Compliance brand.

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