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The Welfare Consequences of Hospital Mergers

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  • Robert Town
  • Douglas Wholey
  • Roger Feldman
  • Lawton R. Burns
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    Abstract

    In the 1990s the US hospital industry consolidated. This paper estimates the impact of the wave of hospital mergers on welfare focusing on the impact on consumer surplus for the under-65 population. For the purposes of quantifying the price impact of consolidations, hospitals are modeled as an input to the production of health insurance for the under-65 population. The estimates indicate that the aggregate magnitude of the impact of hospital mergers is modest but not trivial. In 2001, average HMO premiums are estimated to be 3.2% higher than they would have been absent any hospital merger activity during the 1990s. In 2003, we estimate that because of hospital mergers private insurance rolls declined by approximately .3 percentage points or approximately 695,000 lives with the vast majority of those who lost private insurance joining the ranks of the uninsured. Our estimates imply that hospital mergers resulted in a cumulative consumer surplus loss of over $42.2 billion between 1990 and 2001. It is estimated that all but a modest $95.4 million of the loss in consumer surplus is transferred from consumers to providers.

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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12244.

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    Date of creation: May 2006
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    Handle: RePEc:nbr:nberwo:12244

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    1. Fabio Panetta & Dario Focarelli, 2003. "Are Mergers Beneficial to Consumers? Evidence from the Italian Market for Bank Deposits," CEIS Research Paper, Tor Vergata University, CEIS 10, Tor Vergata University, CEIS.
    2. Marianne Bertrand & Esther Duflo & Sendhil Mullainathan, 2002. "How Much Should We Trust Differences-in-Differences Estimates?," NBER Working Papers 8841, National Bureau of Economic Research, Inc.
    3. Martin Gaynor & William B. Vogt, . "Antitrust and Competition in Health Care Markets," GSIA Working Papers, Carnegie Mellon University, Tepper School of Business 1999-E29, Carnegie Mellon University, Tepper School of Business.
    4. Gruber, J. & Poterba, J., 1994. "Tax Incentives and the Decision to Purchase Health Insurance: Evidence from the Self-Employed," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 94-10, Massachusetts Institute of Technology (MIT), Department of Economics.
    5. Robert Town & Roger Feldman & Douglas Wholey, 2004. "The Impact of Ownership Conversions on HMO Performance," International Journal of Health Care Finance and Economics, Springer, Springer, vol. 4(4), pages 327-342, December.
    6. Joseph Farrell and Carl Shapiro., 1988. "Horizontal Mergers: An Equilibrium Analysis," Economics Working Papers, University of California at Berkeley 8880, University of California at Berkeley.
    7. Allen N. Berger & Anthony Saunders & Joseph M. Scalise & Gregory F. Udell, 1997. "The effects of bank mergers and acquisitions on small business lending," Proceedings, Federal Reserve Bank of Chicago 549, Federal Reserve Bank of Chicago.
    8. Robert Town & Douglas Wholey & Roger Feldman & Lawton R. Burns, 2005. "Did the HMO Revolution Cause Hospital Consolidation?," NBER Working Papers 11087, National Bureau of Economic Research, Inc.
    9. Martin Gaynor & William B Vogt, 2003. "Competition among Hospitals," The Centre for Market and Public Organisation, Department of Economics, University of Bristol, UK 03/087, Department of Economics, University of Bristol, UK.
    10. Cutler, David M & Gruber, Jonathan, 1996. "Does Public Insurance Crowd Out Private Insurance?," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 111(2), pages 391-430, May.
    11. Katherine Ho, 2005. "Insurer-Provider Networks in the Medical Care Market," NBER Working Papers 11822, National Bureau of Economic Research, Inc.
    12. Capps, Cory & Dranove, David & Satterthwaite, Mark, 2003. " Competition and Market Power in Option Demand Markets," RAND Journal of Economics, The RAND Corporation, vol. 34(4), pages 737-63, Winter.
    13. 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.
    14. Raymond Deneckere & Carl Davidson, 1985. "Incentives to Form Coalitions with Bertrand Competition," RAND Journal of Economics, The RAND Corporation, vol. 16(4), pages 473-486, Winter.
    15. Dario Focarelli & Fabio Panetta, 2003. "Are Mergers Beneficial to Consumers? Evidence from the Market for Bank Deposits," American Economic Review, American Economic Association, American Economic Association, vol. 93(4), pages 1152-1172, September.
    16. Kim, E Han & Singal, Vijay, 1993. "Mergers and Market Power: Evidence from the Airline Industry," American Economic Review, American Economic Association, American Economic Association, vol. 83(3), pages 549-69, June.
    17. Chernew, Michael & Cutler, David & Keenan, Patricia S., 2005. "Increasing Health Insurance Costs and the Decline in Health Insurance Coverage," Scholarly Articles 2660660, Harvard University Department of Economics.
    18. Salant, Stephen W & Switzer, Sheldon & Reynolds, Robert J, 1983. "Losses from Horizontal Merger: The Effects of an Exogenous Change in Industry Structure on Cournot-Nash Equilibrium," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 98(2), pages 185-99, May.
    19. Prager, Robin A & Hannan, Timothy H, 1998. "Do Substantial Horizontal Mergers Generate Significant Price Effects? Evidence from the Banking Industry," Journal of Industrial Economics, Wiley Blackwell, Wiley Blackwell, vol. 46(4), pages 433-52, December.
    20. Perry, Martin K & Porter, Robert H, 1985. "Oligopoly and the Incentive for Horizontal Merger," American Economic Review, American Economic Association, American Economic Association, vol. 75(1), pages 219-27, March.
    21. McAfee, R Preston & Williams, Michael A, 1992. "Horizontal Mergers and Antitrust Policy," Journal of Industrial Economics, Wiley Blackwell, Wiley Blackwell, vol. 40(2), pages 181-87, June.
    22. Borenstein, Severin, 1990. "Airline Mergers, Airport Dominance, and Market Power," American Economic Review, American Economic Association, American Economic Association, vol. 80(2), pages 400-404, May.
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    Cited by:
    1. Martin Gaynor & Robert J Town, 2012. "Competition in Health Care Markets," The Centre for Market and Public Organisation, Department of Economics, University of Bristol, UK 12/282, Department of Economics, University of Bristol, UK.
    2. Darius Lakdawalla & Neeraj Sood, 2006. "Health Insurance as a Two-Part Pricing Contract," NBER Working Papers 12681, National Bureau of Economic Research, Inc.
    3. Gaynor, Martin & Laudicella, Mauro & Propper, Carol, 2012. "Can governments do it better? Merger mania and hospital outcomes in the English NHS," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8802, C.E.P.R. Discussion Papers.
    4. Tamara Hayford, 2011. "The Impact of Hospital Mergers on Treatment Intensity and Health Outcomes: Working Paper 2011-05," Working Papers, Congressional Budget Office 42753, Congressional Budget Office.
    5. Dan Friesner & Chris Stevens, 2007. "Ownership and rent-seeking behavior in specialty health care practices," Economics Bulletin, AccessEcon, vol. 9(10), pages 1-14.
    6. Gabriel Desgranges & Stéphane Gauthier, 2014. "Rationalizability and Efficiency in an Asymmetric Cournot Oligopoly," Documents de travail du Centre d'Economie de la Sorbonne, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne 14028, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    7. Brekke, Kurt R. & Siciliani, Luigi & Straume, Odd Rune, 2013. "Hospital Mergers: A Spatial Competition Approach," Discussion Paper Series in Economics, Department of Economics, Norwegian School of Economics 8/2013, Department of Economics, Norwegian School of Economics.
    8. repec:ebl:ecbull:v:9:y:2007:i:10:p:1-14 is not listed on IDEAS
    9. Martin Gaynor & Kate Ho & Robert Town, 2014. "The Industrial Organization of Health Care Markets," NBER Working Papers 19800, National Bureau of Economic Research, Inc.

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