Antitrust Policy and Hospital Mergers: Recommendations for a New Approach

This is the authors' abstract. We don't add key points for this paper.

Antitrust Policy and Hospital Mergers: Recommendations for a New Approach I. IntroductionDuring the 1990s, there were over 900 hospital mergers and acquisitions, many involving hospitals in the same metropolitan areas. 1 These transactions consolidated the hospital industry, dramatically concentrating the supply of hospital services.In principle, several purposes motivated this consolidation.First, consolidation might have facilitated the elimination of excessive beds and services.By the end of the 1980s, the average hospital capacity utilization rate had fallen to 60 percent. 2 Indeed, eliminating excess capacity 3 or duplicative services was a stated goal of many hospital mergers. 4 This consolidation also appears to be a direct response to the simultaneous growth of managed care 5 and the shift to outpatient care in the 1980s and 1990s.Merging hospitals rarely mention a second plausible motive, namely, to enhance market power with respect to managed care organizations (MCOs).MCOs obtain discounts from hospitals' stated charges by threatening to steer patients to alternative hospitals offering more favorable pricing.To make this threat credible, Preferred Provider Organizations (PPOs) generally charge enrollees higher copayments if they visit a non-contracting hospital, while Health Maintenance Organizations (HMOs) usually provide no coverage at all for non-emergency care at non-contracting providers.This threat enables MCOs to play hospitals against each other to extract larger discounts.By consolidating, hospitals can limit the ability of MCOs to steer patients, and thereby resist MCO demands for discounts.1 Irving Levin Associates, a health care research company that tracks hospital mergers, reports 1,042 hospital mergers and acquisitions between 1/1/1993 and 1/1/2001.944 of these transactions were valued at over $10 million.Note, however, that the 1,042 transactions include hospitals involved in multiple transactions.See http://www.levinassociates.com/.