Hospital Merger Benefits: Views from Hospital Leaders and Econometric Analysis
Hospital leaders consistently indicated in interviews that hospital mergers can result in substantial benefits, and their views are supported by our econometric analyses. In structured interviews with this study’s authors, these leaders described several mechanisms through which mergers decrease costs, including benefits of scale, reduced costs of capital, and clinical standardization. While these cost reductions most greatly benefit the acquired hospitals, the benefits of scale inure to the acquirers as well. These views are confirmed in our empirical analyses, which find a statistically significant 2.5 percent reduction in annual operating expenses per admission at acquired hospitals. We also estimate a statistically significant decline in revenue per admission following acquisition, which appears inconsistent with studies that link hospital consolidation with higher prices paid by managed care organizations.
Hospital leaders also noted substantial quality benefits from hospital mergers, again due to standardization of clinical protocols as well as from investments made to upgrade services at acquired hospitals, deployment or recruitment of additional medical staff to the acquired hospitals, and concentrating provision of complex services at a limited number of system hospitals to benefit from increased volume. Our empirical analyses find modest support for these effects: our measures of changes in outcomes post-merger indicate some improvement, but by statistically insignificant amounts. This finding is perhaps not surprising, given the relative imprecision of publicly available measures of hospital quality as well as the time that it takes to implement quality-enhancing operational changes.
In the Federal Trade Commission’s (FTC) recent statement closing its investigation of and challenge to Cabell Huntington Hospital’s proposed acquisition of St. Mary’s Medical Center in Huntington, West Virginia, the FTC expressed skepticism regarding the benefits of the acquisition, asserting:
We understand that coordination of care has the potential to further key goals of healthcare reform and consider those benefits when evaluating a provider merger…Claimed benefits, however, are only cognizable if they are merger-specific. Many of the purported benefits of hospital mergers—including coordination of patient care, sharing information through electronic medical records, population health management, risk-based contracting, standardizing care, and joint purchasing—can often be achieved through alternative means that do not impair competition.1
Many hospital leaders disagree with the FTC’s view that the benefits of mergers and acquisitions can be achieved through looser affiliations that do not bind the parties financially. Based on their experience with a range of types of combinations, these hospital leaders find that such looser affiliations do not provide the commitment and accountability necessary to effectuate the change required to achieve the cost savings and quality benefits that health care reform initiatives promote.
This report outlines two distinct analyses of the questions relating to the benefits achieved through hospital combinations and the “merger-specificity”2 of those benefits. First, we summarize the findings from structured interviews with hospital executives from 20 different hospital systems regarding their experiences with and “lessons learned” from myriad hospital affiliations—both mergers and looser affiliations—that they have undertaken in recent years. We describe the methodology used to conduct these interviews and provide general conclusions from the observations that were shared with us during the interviews. Second, we present the results of an econometric analysis that compares hospitals that have undergone mergers or acquisitions with similar hospitals that have not, both with respect to changes in hospital costs and publicly available measures of outcome.
In the next section, we provide background on the issues related to the benefits of hospital consolidation. In Section III, we present findings from our structured interviews with hospital executives, describing our methodology, analysis, and conclusions. The following section discusses our econometric analysis of cost and quality effects of hospital mergers. Section V concludes.
1. Federal Trade Commission, Statement of the Federal Trade Commission, In the Matter of Cabell Huntington Hospital, Inc., Docket No. 9366. July 6, 2016, p.2. (Available at https://www.ftc.gov/system/files/documents/public_statements/969783/160706cabellcommstmt.pdf.)
2. We use the term “merger-specificity” to connote results that can only be achieved through merger, and not unilaterally or through other types of affiliations or actions. This meaning is consistent with the antitrust agencies’ typical interpretation of the Horizontal Merger Guidelines. U.S. Department of Justice and Federal Trade Commission, Horizontal Merger Guidelines. August 19, 2010, §10. (Available at https://www.ftc.gov/sites/default/files/attachments/merger-review/100819hmg.pdf.)