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The Effects of Market Concentration and Horizontal Mergers on Hospital Costs and Prices

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  • Robert Connor
  • Roger Feldman
  • Bryan Dowd
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    Abstract

    Antitrust advocates believe that horizontal consolidation in hospital markets can reduce competition and increase prices while merger advocates believe it can benefit consumers by reducing service duplication. This study analyzed the market conditions, operating characteristics, and costs and prices of approximately 3500 short-term general hospitals (including 112 within-market-area mergers) from 1986 to 1994 to investigate the effects of market concentration, hospital mergers, and managed care penetration. The results show: a shift away from non-price competition toward price competition in health care markets; that this shift was fueled by increased market penetration by price-sensitive buyers; that horizontal hospital mergers produced average cost savings of approximately 5%, which were generally passed on to consumers as lower prices; that cost savings were generally greater for mergers of similar-size hospitals, with a higher degree of duplicative services, and with lower pre-merger occupancy rates; and some evidence that post-merger price reductions were smaller in less-competitive markets.

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    File URL: http://www.tandfonline.com/10.1080/13571519884495
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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal International Journal of the Economics of Business.

    Volume (Year): 5 (1998)
    Issue (Month): 2 ()
    Pages: 159-180

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    Handle: RePEc:taf:ijecbs:v:5:y:1998:i:2:p:159-180

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    Web page: http://www.tandfonline.com/CIJB20

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    Related research

    Keywords: Hospital Mergers; Antitrust; Competition; Market Concentration; Economies Of Scale;

    References

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    1. Zwanziger, Jack & Melnick, Glenn A., 1988. "The effects of hospital competition and the Medicare PPS program on hospital cost behavior in California," Journal of Health Economics, Elsevier, vol. 7(4), pages 301-320, December.
    2. Dranove, David & Shanley, Mark & White, William D, 1993. "Price and Concentration in Hospital Markets: The Switch from Patient-Driven to Payer-Driven Competition," Journal of Law and Economics, University of Chicago Press, vol. 36(1), pages 179-204, April.
    3. Hay, George A & Werden, Gregory J, 1993. "Horizontal Mergers: Law, Policy, and Economics," American Economic Review, American Economic Association, vol. 83(2), pages 173-77, May.
    4. Robinson, James C. & Luft, Harold S., 1985. "The impact of hospital market structure on patient volume, average length of stay, and the cost of care," Journal of Health Economics, Elsevier, vol. 4(4), pages 333-356, December.
    5. Lynk, William J, 1995. "Nonprofit Hospital Mergers and the Exercise of Market Power," Journal of Law and Economics, University of Chicago Press, vol. 38(2), pages 437-61, October.
    6. Noether, Monica, 1988. "Competition among hospitals," Journal of Health Economics, Elsevier, vol. 7(3), pages 259-284, September.
    7. Robinson, James C. & Phibbs, Ciaran S., 1990. "An evaluation of Medicaid selective contracting in California," Journal of Health Economics, Elsevier, vol. 8(4), pages 437-455, February.
    8. Lynk, William J., 1995. "The creation of economic efficiencies in hospital mergers," Journal of Health Economics, Elsevier, vol. 14(5), pages 507-530, December.
    9. S. Baranzoni & P. Bianchi & L. Lambertini, 2000. "Market Structure," Working Papers 368, Dipartimento Scienze Economiche, Universita' di Bologna.
    10. Breyer, Friedrich, 1987. "The specification of a hospital cost function : A comment on the recent literature," Journal of Health Economics, Elsevier, vol. 6(2), pages 147-157, June.
    11. Staten, Michael & Umbeck, John & Dunkelberg, William, 1988. "Market share/market power revisited : A new test for an old theory," Journal of Health Economics, Elsevier, vol. 7(1), pages 73-83, March.
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    Cited by:
    1. Boris Augurzky & Dirk Engel & Christoph Schwierz, 2006. "Who gets the Credit? Determinants of the Probability of Default in the German Hospital Sector," RWI Discussion Papers 0054, Rheinisch-Westfälisches Institut für Wirtschaftsforschung.
    2. Vivian Wu, 2010. "Hospital cost shifting revisited: new evidence from the balanced budget act of 1997," International Journal of Health Care Finance and Economics, Springer, vol. 10(1), pages 61-83, March.
    3. Yu-Chu Shen & Vivian Wu & Glenn Melnick, 2008. "The Changing Effect of HMO Market Structure: An Analysis of Penetration, Concentration, and Ownership Between 1994-2005," NBER Working Papers 13775, National Bureau of Economic Research, Inc.
    4. Michael D. Rosko, 2001. "Cost efficiency of US hospitals: a stochastic frontier approach," Health Economics, John Wiley & Sons, Ltd., vol. 10(6), pages 539-551.
    5. Leemore S. Dafny, 2005. "Estimation and Identification of Merger Effects: An Application to Hospital Mergers," NBER Working Papers 11673, National Bureau of Economic Research, Inc.

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