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The Welfare Consequences of Hospital Mergers

  • Robert Town
  • Douglas Wholey
  • Roger Feldman
  • Lawton R. Burns
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    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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    File URL: http://www.nber.org/papers/w12244.pdf
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    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. Martin Gaynor & William Vogt, 2002. "Competition Among Hospitals," GSIA Working Papers 2003-E20, Carnegie Mellon University, Tepper School of Business.
    2. 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, vol. 46(4), pages 433-52, December.
    3. Berger, Allen N. & Saunders, Anthony & Scalise, Joseph M. & Udell, Gregory F., 1998. "The effects of bank mergers and acquisitions on small business lending," Journal of Financial Economics, Elsevier, vol. 50(2), pages 187-229, November.
    4. Jonathan Gruber & James Poterba, 1994. "Tax Incentives and the Decision to Purchase Health Insurance: Evidence from the Self-Employed," The Quarterly Journal of Economics, Oxford University Press, vol. 109(3), pages 701-733.
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    6. David M. Cutler & Jonathan Gruber, 1996. "Does Public Insurance Crowd out Private Insurance?," The Quarterly Journal of Economics, Oxford University Press, vol. 111(2), pages 391-430.
    7. 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.
    8. 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.
    9. Martin Gaynor & William B. Vogt, 1999. "Antitrust and Competition in Health Care Markets," NBER Working Papers 7112, National Bureau of Economic Research, Inc.
    10. Dario Focarelli & Fabio Panetta, 2003. "Are Mergers Beneficial to Consumers? Evidence from the Market for Bank Deposits," American Economic Review, American Economic Association, vol. 93(4), pages 1152-1172, September.
    11. 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.
    12. Katherine Ho, 2009. "Insurer-Provider Networks in the Medical Care Market," American Economic Review, American Economic Association, vol. 99(1), pages 393-430, March.
    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. Borenstein, Severin, 1990. "Airline Mergers, Airport Dominance, and Market Power," American Economic Review, American Economic Association, vol. 80(2), pages 400-404, May.
    15. 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.
    16. Joseph Farrell and Carl Shapiro., 1988. "Horizontal Mergers: An Equilibrium Analysis," Economics Working Papers 8880, University of California at Berkeley.
    17. Kim, E Han & Singal, Vijay, 1993. "Mergers and Market Power: Evidence from the Airline Industry," American Economic Review, American Economic Association, vol. 83(3), pages 549-69, June.
    18. McAfee, R Preston & Williams, Michael A, 1992. "Horizontal Mergers and Antitrust Policy," Journal of Industrial Economics, Wiley Blackwell, vol. 40(2), pages 181-87, June.
    19. 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.
    20. Gruber, J. & Poterba, J., 1994. "Tax Incentives and the Decision to Purchase Health Insurance: Evidence from the Self-Employed," Working papers 94-10, Massachusetts Institute of Technology (MIT), Department of Economics.
    21. Robert Town & Roger Feldman & Douglas Wholey, 2004. "The Impact of Ownership Conversions on HMO Performance," International Journal of Health Economics and Management, Springer, vol. 4(4), pages 327-342, December.
    22. Stephen W. Salant & Sheldon Switzer & Robert J. Reynolds, 1983. "Losses From Horizontal Merger: The Effects of an Exogenous Change in Industry Structure on Cournot-Nash Equilibrium," The Quarterly Journal of Economics, Oxford University Press, vol. 98(2), pages 185-199.
    23. Fabio Panetta & Dario Focarelli, 2003. "Are Mergers Beneficial to Consumers? Evidence from the Italian Market for Bank Deposits," CEIS Research Paper 10, Tor Vergata University, CEIS.
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