What Does Willingness-to-Pay Reveal About Hospital Market Power in Merger Cases?

Abstract

In hospital merger cases, the courts have often based geographic market areas on patient flow criteria. Given patient heterogeneity and the importance of distance to hospitals and health plan restrictions on hospital choices, Capps, Dranove, and Satterthwaite (2003) show that potential market power effects can be understated. While willingness-to-pay (WTP) measures derived from logit demand models provide an alternative approach, for antitrust purposes it is necessary to show how WTP relates to the likely price effects of mergers. This paper examines the connection between health plan prices and WTP that results from bargaining between managed care plans and hospitals. We study two merger cases in Florida and New York State to evaluate the reliability of this measure. Employing data available before a merger has occurred, we find that this method can provide reliable predictions of patients' post-merger willingness-to-pay that imply conservative predictions of post-merger prices.

Keywords: Hospital Mergers, Geographic Market Delineation, Patient Choice, Willingness-To-Pay, Conditional Logit

JEL Classification: L40, I11, I18