The Price Effects of Cross-Market Hospital Mergers (WP-16-05)


WP-16-05

Leemore Dafny, Kate Ho, and Robin S. Lee

So-called “horizontal mergers” of hospitals in the same geographic market have garnered significant attention from researchers and regulators alike. However, much of the recent hospital industry consolidation spans multiple markets serving distinct patient populations. The authors show that such combinations can reduce competition among the merging providers for inclusion in insurers’ networks of providers, leading to higher prices. The result derives from the presence of “common customers (i.e. purchasers of insurance plans) who value both providers, as well as (one or more) “common insurers” with which price and network status is negotiated. They test their 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. They find that hospitals gaining system members in-state (but not in the same geographic market) experience price increases of 6-10 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. This effect remains sizeable even when the merging parties are located further than 90 minutes apart. The results suggest that cross-market, within-state hospital mergers appear to increase hospital systems’ leverage when bargaining with insurers.

Leemore Dafny, Herman Smith Research Professor in Hospital and Health Services, Professor of Strategy, and IPR Associate, Northwestern University
Kate Ho, Associate Professor of Economics, Columbia University
Robin S. Lee, Assistant Professor of Economics, Harvard University

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