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Another Study Links Hospital Mergers to Higher Prices

News  |  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.

HLM: Did you find any instances of cross-market mergers reducing prices?

Dafny: It's a regression analysis, so I have an average and there is an effect and a range and I can't single out any individual transactions. I would suspect that there are. Just as with any mergers, to evaluate the effects it is a merger-specific enterprise. I would never say 'all.' I would just say on average the effect seems to be to increase prices within states. That means you have to ask tough questions and take a look at these deals.

HLM: Are you suggesting that hospital boards should look at alternatives to mergers?

Dafny: It would be cavalier to propose a one-size-fits-all solution, but quite often there is an alternative. If there isn't, if it's "I'm going to go under unless someone acquires me and is able to negotiate a higher price," I would think carefully about whether that is in the best interests of the community.

Sometimes when you raise a community's healthcare costs, you jeopardize the community because it puts a strain on local businesses and their ability to stay open. If you really think the only way to stay open is to use bargaining power to raise prices, that might not serve the best interests of the community.

HLM: How would you like to see this study used?

Dafny: The number one place is in hands of decision makers who are going to frame our healthcare system for the future. I want it to be a competitive one based on creating value and not on creating market power.

The second is I would like the states' attorneys general who have requested this study and others who have heard preliminary presentations to consider whether there are cases in their docket that they might want to pursue and try to protect competition.

HLM: Should they use this study as a hammer or a scalpel?

Dafny: You always need to look at these transactions on a case-by-case basis. There isn't a one-size-fits-all. This raises some important questions. I'd like to see more work evaluating, extending confirming the findings. That's always good practice. But I also don't think we should wait until the entire sector is consolidated and merged away before we decide that there is enough evidence to raise concerns because, unscrambling the eggs is nearly impossible.

HLM: Did you receive any funding from the health insurance industry for this study?

Dafny: No funding, and in my co-authors work as well, nobody has received any funding.

When I write a paper like this, the insurance industry probably is appreciative. And then I write a paper on insurance mergers being potentially harmful and I am on their hit list. I am not about being on anyone's side except for the side of efficiency.

HLM: What response is your study getting?

Dafny: A couple of insurers I previewed this report with said 'of course we know this is happening.' In Mergerland, the merger is going to lead to price increases simply because of the greater ability of the merged entity to threaten the insurer. That is an anticompetitive transaction.

The fact that they are just waved through is concerning for the whole industry and our country because our healthcare spend is so incredibly high. The goal is to compete on value. That is what works in other industries and I am concerned that if our business leaders try so hard to avoid that we will end up with an even more expensive and ineffective sector without any choice in it.

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

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