Re-Aligning Prospective Hospital Merger Guidance: Moving Beyond Concentration to More Meaningful Approaches
25 Pages Posted: 13 Apr 2015
Date Written: April 10, 2015
Mergers and acquisitions play a key role in industries facing disruptive change and the need to restructure effectively to meet future needs; transactions provide potential opportunities for substantial benefits. Significant realignment of the U.S. healthcare delivery system is underway, driven by economic, policy, and demographic factors, with many hospitals, particularly stand-alone hospitals, financially challenged. The effects of these trends are most visible in smaller metro areas, which often have greater hospital capacity than required to meet demand. Over 500 hospital transactions have occurred in recent years; about half involved stand-alone hospitals, many in smaller communities. An anticipated increase in hospital transactions in the near term suggests the importance of clear agency guidance on the factors that will distinguish transactions that are likely to be challenged.
Agency guidance about future enforcement on hospital mergers contrasts with actual enforcement practice. Guidance emphasizes concentration and Merger Guidelines thresholds, even though the vast majority of past hospital mergers, including most of those that exceeded Guidelines thresholds, went unchallenged. Academic price-concentration studies play a uniquely prominent role in statements of enforcement intentions in the healthcare industry, even though those studies are largely dated and mixed in their findings. Limited clarity exists on factors that mattered to competitive effects analysis in concentrated markets with closely reviewed yet unchallenged mergers. Moreover, the modeling used in hospital merger review may not account for current and evolving market realities of healthcare delivery and purchasing.
This paper reviews healthcare delivery trends in the context of recommendations for competitive effects analyses and guidance in industries characterized by dynamic change, differentiated products, large numbers of mergers, and low incidence of actual challenges. It shows that, where concentration thresholds are poor predictors of competitive effects, greater clarity is required of the specific factors other than structure that yielded assessments that mergers in highly concentrated markets were unlikely to result in a substantial lessening of competition. The many changes in healthcare markets necessitate closer scrutiny of economic models to assure they are robust and reflect market realities, including the responsiveness of rivals and payors. Given the substantial reliance on academic studies for guidance, we review the oft-cited concentration-price literature and find that it does not support the claimed systematic quantitative relationship. We undertook independently to address these issues empirically by updating a major study using a comprehensive and current commercial claims database covering 380 metropolitan areas. We found no systematic quantifiable relationship; instead myriad market and firm specific factors account for price variation. Finally, we present some suggestions for review of future transactions.
Keywords: competition; mergers; healthcare; hospitals; competitive effects
JEL Classification: I11, I18, L41, L44
Suggested Citation: Suggested Citation