The Price Effects of Cross-Market Hospital Mergers

Leemore Dafny, Kate Ho, Robin S. Lee

NBER Working Paper No. 22106
Issued in March 2016, Revised in June 2017
NBER Program(s):Health Care, Industrial Organization

So-called “horizontal mergers” of firms whose products are direct substitutes at the point of sale have garnered significant attention from researchers and regulators alike. We consider the effect of mergers between firms whose products are not viewed as direct substitutes for the same good or service, but are bundled by a common intermediary. Focusing on the case of hospital mergers across distinct geographic markets (“cross-market” mergers), we show that such combinations can reduce competition among the merging firms for inclusion in intermediary insurers' networks, leading to higher prices (or lower-quality care). The result derives from the presence of “common customers” (i.e. purchasers of insurance plans) who value both hospitals, as well as (one or more) “common insurers” with which price and network status is negotiated. We test our theoretical predictions using two samples of cross-market hospital mergers, focusing exclusively on hospitals that are bystanders rather than the likely drivers of the transactions in order to address concerns about the endogeneity of merger activity. We find that hospitals gaining system members in-state (but not in the same geographic market) experience price increases of 7-10 percent relative to control hospitals, while hospitals gaining system members out-of-state exhibit no statistically significant changes in price. The former group are likelier to share common customers and insurers. The results suggest that cross-market, within-state hospital mergers increase hospital systems' leverage when bargaining with insurers.

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Document Object Identifier (DOI): 10.3386/w22106

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