“…Previous literature sheds some light on this puzzle. Summarizing surveys of industries representing six countries, Scherer et al (1975) find production cost savings opportunities associated with multi‐plant coordination in most of the industries. These opportunities were not always capitalized on, however, with one provided explanation being that many firms were not able to overcome managerial difficulties associated with optimizing production across multiple plants.…”
Section: Discussionmentioning
confidence: 99%
“…Firm‐wide cybersecurity attacks are not possible where there are no firm‐wide information technology systems, and firm‐wide systems are not implemented without reason. This increased use of computing technology by multi‐plant firms was predicted by Scherer et al (1975) decades ago:As the capacity of electronic data processing equipment grows and as persons trained to use that capacity analytically flow from the universities into industry, the ability of multi‐plant, multi‐product firms to solve complex production assignment and scheduling problems is bound to increase. One significant by‐product may be an increase in the cost savings realizable through multi‐plant operation… We nevertheless believe that there is much unmined gold left in the hills… .…”
Section: Discussionmentioning
confidence: 99%
“…Operating multiple plants in different geographic regions has long been recognized as a potential source for economic advantages in a variety of industries (Scherer et al, 1975), including beef packing (Azzam & Schroeter, 1995). That said, there has been limited work regarding the economic rationale of operating multiple plants in the beef packing industry specifically, with advantages typically being assumed (Ward, 2010).…”
Section: Industry Background and Literature Reviewmentioning
Most U.S. beef packers with multiple plants now openly employ multi‐plant coordination. Using a Salop Circular City framework that includes negotiated and formula pricing, we demonstrate that multi‐plant coordination leads to wider spreads between downstream beef prices and upstream fed cattle prices if multi‐plant coordination markdowns outweigh multi‐plant coordination efficiencies. Taken together with market concentration, geography and transportation costs, and cattle cycles and related beef packer capacity utilization, multi‐plant coordination helps explain persistently wide farm‐to‐wholesale beef price spreads. We find that, as cattle inventories decline, a multi‐plant coordinator will permanently shut down a plant before the same plant run as a separate profit center will shut down, which is consistent with packer behavior in recent years. We also demonstrate that adding a strategically‐located packing plant, owned by an entrant firm, can narrow price spreads. This framework is important for ongoing policy discussions regarding the structure, conduct, and performance of the beef packing industry.
“…Previous literature sheds some light on this puzzle. Summarizing surveys of industries representing six countries, Scherer et al (1975) find production cost savings opportunities associated with multi‐plant coordination in most of the industries. These opportunities were not always capitalized on, however, with one provided explanation being that many firms were not able to overcome managerial difficulties associated with optimizing production across multiple plants.…”
Section: Discussionmentioning
confidence: 99%
“…Firm‐wide cybersecurity attacks are not possible where there are no firm‐wide information technology systems, and firm‐wide systems are not implemented without reason. This increased use of computing technology by multi‐plant firms was predicted by Scherer et al (1975) decades ago:As the capacity of electronic data processing equipment grows and as persons trained to use that capacity analytically flow from the universities into industry, the ability of multi‐plant, multi‐product firms to solve complex production assignment and scheduling problems is bound to increase. One significant by‐product may be an increase in the cost savings realizable through multi‐plant operation… We nevertheless believe that there is much unmined gold left in the hills… .…”
Section: Discussionmentioning
confidence: 99%
“…Operating multiple plants in different geographic regions has long been recognized as a potential source for economic advantages in a variety of industries (Scherer et al, 1975), including beef packing (Azzam & Schroeter, 1995). That said, there has been limited work regarding the economic rationale of operating multiple plants in the beef packing industry specifically, with advantages typically being assumed (Ward, 2010).…”
Section: Industry Background and Literature Reviewmentioning
Most U.S. beef packers with multiple plants now openly employ multi‐plant coordination. Using a Salop Circular City framework that includes negotiated and formula pricing, we demonstrate that multi‐plant coordination leads to wider spreads between downstream beef prices and upstream fed cattle prices if multi‐plant coordination markdowns outweigh multi‐plant coordination efficiencies. Taken together with market concentration, geography and transportation costs, and cattle cycles and related beef packer capacity utilization, multi‐plant coordination helps explain persistently wide farm‐to‐wholesale beef price spreads. We find that, as cattle inventories decline, a multi‐plant coordinator will permanently shut down a plant before the same plant run as a separate profit center will shut down, which is consistent with packer behavior in recent years. We also demonstrate that adding a strategically‐located packing plant, owned by an entrant firm, can narrow price spreads. This framework is important for ongoing policy discussions regarding the structure, conduct, and performance of the beef packing industry.
“…Economists find little evidence that multiplant scale is associated with product-specific economies. 90,91 Overall, the economies of centralized management observed in industry are slight and threatened by scale diseconomies in managing too many plants. There also does not appear to be any correlation between multiplant operation and industry concentration.…”
Section: Cross-market Mergersmentioning
confidence: 99%
“…Combining a given configuration into a chain only helps if there are cross‐plant scale economies. Economists find little evidence that multiplant scale is associated with product‐specific economies 90,91 . Overall, the economies of centralized management observed in industry are slight and threatened by scale diseconomies in managing too many plants.…”
Section: Regional System Formations: An Evidence‐based Assessment Of ...mentioning
Hospital executives posit a number of rationales for system mergers which lack any basis in academic evidence. Decades of academic research question whether system combinations confer public benefits. Antitrust authorities need to continue to closely scrutinize these transactions.
Recently, mergers of hospital systems that span different geographic markets are on the rise. Economists have alerted policymakers about the potential impacts such cross‐market mergers may have on hospital prices. We suggest there are other reasons for concern that scholars have not often confonted. Cross‐market mergers may be conducted for purely self‐serving reasons of organizational growth that increases executive compensation. Combinations of sellers should have clear advantages to consumers. System executives and their boards should bear the burden of proof.
Federal regulators and state attorney generals should be cognizant that rationales for cross‐market systems advanced by merging parties are unlikely to be operative or dominant in merger decision making.
Policymakers should be careful about passing legislation that encourages hospitals to consolidate.
Context
There is a growing trend of combinations among hospital systems that operate in different geographic markets known as cross‐market mergers. Economists have analyzed these broader systems in terms of their anticompetitive behavior and pricing power over insurers. This paper evaluates the benefits advanced by these new hospital systems that speak to a different set of issues not usually studied: increased efficiencies, new capabilities, operating synergies, and addressing health inequities. The paper thus “looks under the hood” of these emerging, cross‐market systems to assess what value they might bestow and upon whom.
Methods
The paper examines recently announced cross‐market mergers in terms of their supposed benefits, as expressed by the systems’ executives as well as by industry consultants. These presumed benefits are then evaluated against existing evidence regarding hospital system outcomes.
Findings
Advocates of cross‐market hospital mergers cite a host of benefits. Research suggests these benefits are nonexistent. Additional evidence suggests other motives may be at play in the formation of cross‐market mergers that have nothing to do with efficiencies, synergies, or community benefits. Instead these mergers may be self‐serving efforts by system chief executive officers (CEOs) to boost their compensation.
Conclusions
Cross‐market hospital mergers may yield no benefits to the hospitals involved or the communities in which they operate. The boards of hospital systems that engage in these cross‐market mergers need to exercise greater diligence over the actions of their CEOs.
scite is a Brooklyn-based organization that helps researchers better discover and understand research articles through Smart Citations–citations that display the context of the citation and describe whether the article provides supporting or contrasting evidence. scite is used by students and researchers from around the world and is funded in part by the National Science Foundation and the National Institute on Drug Abuse of the National Institutes of Health.
