Antitrust Policy and Hospital Mergers: Recommendations for a New Approach (WP-02-24)


IPR-WP-02-24

Cory S. Capps, David Dranove, Shane Greenstein, and Mark Satterthwaite

During the 1990s, hundreds of mergers consolidated the hospital industry. In principle, several purposes motivated this consolidation. First, consolidation might have facilitated the elimination of excessive beds and services. Second, if hospitals consolidate, they can limit the ability of managed care organizations to steer patients, and they can resist demands for discounts.

Despite their potential to enhance market power, the Federal Trade Commission and Department of Justice have challenged only a handful of hospital mergers. In all but one case, the definition of the relevant geographic market played a key role in the outcome. In all cases, courts have determined geographic boundaries by using an approach for geographic market definition first advocated in Elzinga and Hogarty.

Both the standard merger guidelines and the hospital-specific guidelines advocate using the small but significant non-transitory increase in price (SSNIP) criterion. We have investigated whether inferences using Elzinga-Hogerty analysis get close to the inferences using the ideal SSNIP criterion. We propose three alternative but related methodol-ogies for doing so. We find that mergers that might easily pass muster using Elzinga-Hogerty may easily fail using the SSNIP criterion. We surmise that Elzinga-Hogerty provides a highly inaccurate view of the appropriate market boundaries over a wide range of plausible situations. Hence, we advocate eliminating the use of the Elzinga-Hogerty criterion in any situation where their inferences are ambiguous, which is, practically speaking, in all courtroom proceedings.

A corrected and final version of this article appears in the Winter 2002 issue of The Antitrust Bulletin.

Cory S. Capps, Kellogg School of Management, Northwestern University
David Dranove, Kellogg School of Management, Northwestern University
Shane Greenstein, Kellogg School of Management, Northwestern University
Mark Satterthwaite, Kellogg School of Management, Northwestern University

PDF icon Download working paper PDF