Hoover Daily Report

Merger Policy in Changing Hospital Markets

Monday, December 11, 2000

How should the government evaluate hospital mergers? Mergers can allow hospitals to consolidate out-of-date facilities, share management expertise and decision support systems to improve patient care, and reduce administrative costs. On the other hand, mergers can lead to higher costs and lower quality by reducing competition.

Some experts argue that mergers might be beneficial even if they have anticompetitive effects because they could reduce the tendency of hospitals to spend excessively on technology and procedures that produce minimal benefits for patients. The argument that competition does not make patients better off has led to other steps to limit it, such as regulations limiting the ability of hospitals to add new technologies. But the studies supporting this view are largely based on data from the 1980s, before managed care changed how hospitals and doctors compete.

We examined the likely effects of mergers on the cost and quality of medical treatment by evaluating differences in the care that patients receive in more-competitive versus less-competitive hospital markets and in markets with high versus low levels of managed care. We used 1990s national data on Medicare beneficiaries with heart disease.

Our results show that competition has important benefits for patients. Competition among hospitals led to lower costs and lower rates of adverse health outcomes, holding constant other characteristics of markets and patient populations. It was approximately 8 percent more costly to be treated in the least competitive fourth of hospital markets, as compared to the most competitive fourth. Furthermore, the quality of care in competitive markets was higher. Elderly patients in the least competitive fourth of hospital markets were 1.5 percentage points more likely to die within one year of their heart attack than those in the most competitive areas. Patients from the least competitive markets also experienced higher rates of readmission for some cardiac complications, suggesting that the additional survivors attributable to competition in hospital markets were not in especially marginal health.

We also found that mergers may have benefits through reducing “excess capacity.” Patients from markets with more hospital beds per capita experience more costly treatment and have greater mortality (although they have lower rates of some complications). Similarly, other researchers have found that institutions treating higher volumes of patients can achieve better outcomes and fewer cost-increasing complications.

To the extent that mergers reduce competition and reduce excess capacity, our results suggest that policy analysis should balance these two consequences in deciding whether and how a merger should be approved. For example, a merger in a competitive hospital market should be treated more leniently than a merger in an uncompetitive market. We also found that the benefits of competition were greater in areas with high levels of managed care enrollment but that the costs of excess capacity were similar, suggesting that mergers in areas with a substantial managed care presence should be treated more strictly. Additional analyses will be helpful, particularly on the consequences of mergers for younger patients and patients with other illnesses. But to encourage high-quality care in a cost-effective way, government regulation needs to evolve along with health care markets.