The price effects of cross‐market mergers: theory and evidence from the hospital industry

Abstract

We consider the effect of mergers between firms whose products are not viewed as direct substitutes for the same good or service, but are bundled by a common intermediary. Focusing on hospital mergers across distinct geographic markets, we show that such combinations can reduce competition among merging hospitals for inclusion in insurers' networks, leading to higher prices (or lower‐quality care). Using data on hospital mergers from 1996–2012, we find support that this mechanism operates within state boundaries: cross‐market, within‐state hospital mergers yield price increases of 7%–9 % for acquiring hospitals, whereas out‐of‐state acquisitions do not yield significant increases.

Mergers and Marginal Costs: New Evidence on Hospital Buyer Power

“…Product categories are classified as "High" concentration if its vendor HHI is above the median within its product class. ln(Output Price) is estimated using the HCRIS as in Dafny et al (2017). Standardization is an indicator for whether the hospital purchased at least 75% of all units in a product category from a single vendor in a given calendar year.…”

“…To that end, we estimate our same input price regression specifications, controlling for output prices. We employ the method described in Dafny et al (2017) to infer hospital prices from HCRIS reports.…”

“…Data on census division, beds, FTEs, technologies, admissions, teaching status, non-profit status, Medicare and Medicaid share come from the AHA Annual Survey. Output price is calculated using data from the CMS HCRIS and Medicare Impact Files as in Dafny et al (2017).…”

“…3 Much like in markets for hospital services, prices in hospital input markets are typically determined via bilateral negotiations. In such an environment, the effects of mergers can be complex, depending on how they impact market structure and bargaining abilities (Grennan 2013;Gowrisankaran et al 2015;Lewis and Pflum 2015;Dafny et al 2017). Further, market power in upstream supply markets may decrease prices, but market power in downstream services markets may lead to higher downstream prices, and that greater overall pie may be "shared" with suppliers (Ho and Lee 2017).…”

Multimarket Contact in Health Insurance: Evidence from Medicare Advantage

“…Third, while the standard approach of identification relies on market fixed effects, our identification further exploits out-of-market consolidations and exogenous MA policies, which helps to remove variation in MMC driven by time-varying unobservables also correlated with prices and quality. Similar identification strategies have been used in the hospital setting, including Dafny et al (2012Dafny et al ( , 2017 and Schmitt (2018). In this way, our paper is closest to Schmitt (2018) who examines the impact of MMC on estimated hospital prices; however, Schmitt (2018) adopts an event study approach measuring how prices respond to out-of-market mergers, with the assumption that out-of-market mergers capture exogenous changes in hospital MMC.…”