A new study says merging hospitals quickly exploit their newfound market share by raising prices, regardless of whether the hospitals are for-profit or not-for-profit.
The study, to be published this week in the journal Health Affairs, contradicts two arguments often used by merging hospitals to justify their consolidations to their communities and to antitrust regulators. First, they say consolidation will generate economic savings, which will be passed to consumers. Merging not-for-profits also say their community boards will guard against the temptation to raise prices arbitrarily.
The study says both arguments hold little water. But that may be of little value to antitrust regulators, as the hospital merger boom of the early 1990s has begun to taper off.
However, the Federal Trade Commission and U.S. Justice Department are likely to jump on the study and use it in future cases involving not-for-profit hospital mergers, said William Kopit, a healthcare antitrust lawyer with Epstein Becker & Green in Washington.
Kopit successfully defended merging not-for-profits in Grand Rapids, Mich., and Roanoke, Va., against federal antitrust lawsuits. In those cases, the hospitals argued that their not-for-profit status would prevent market share abuses.
"The study will support the position of those who say there are no differences in ownership," said Kopit, who has not seen the recent study. "There can be differences. You have to look at the evidence in each case."
The study was conducted by Rand Corp., a Santa Monica, Calif.-based research firm. Glenn Melnick, a healthcare finance professor at the University of Southern California, Los Angeles, was the lead researcher on the project, which MODERN HEALTHCARE first reported on in 1997 (Oct. 6, 1997, p. 2).
Grants from HHS and the federal Agency for Health Care Policy and Research supported the study, which examined the pricing practices of nearly all general acute-care hospitals in California, dating back to 1986. Data from about 400 hospitals were included; federal and specialty hospitals were excluded.
Using complex statistical models, the study examined how mergers of various sizes and ownership affected daily-price changes charged to private-pay patients.
The study found that all hospitals, regardless of ownership, raised prices after a merger, and merging hospitals got bolder over time.
For example, two private not-for-profit hospitals that merged in 1989 to control 50% of their market, as measured by patient discharges in a geographic area, raised their prices by an average of 2.8% right after the merger. Similar hospitals that merged in 1994 raised prices by 6.7%.
For public not-for-profits, the 1994 price increase was 13%, and for private for-profits, 20% (See chart, p. 2).
The study found that hospitals in the same market with merging hospitals raised their prices, too, benefiting indirectly from having fewer competitors.
The findings rebut a well-publicized 1995 study that said merging not-for-profits don't raise prices like their for-profit counterparts and, in fact, lower them. An economist who worked for the legal defense team in the Grand Rapids case conducted that study.
The two largest hospitals in Grand Rapids used the 1995 study to persuade a federal judge to dismiss the Federal Trade Commission's antitrust case against them in 1996. The hospitals, Blodgett Memorial Medical Center and Butterworth Hospital, completed their merger a year later, gaining control of 70% of the hospital beds in Grand Rapids.
"The (new) study could have helped the government in the Grand Rapids case," said Emmett Keeler, senior mathematician at Rand, who worked on the data. "There is general agreement that you have to worry about price increases after for-profits merge. If not-for-profits merge, you have to worry about them, too."
Hospital industry lobbyists also used the 1995 study in 1997 to urge Congress to pass legislation that would give not-for-profit hospitals special treatment under federal antitrust laws (Sept. 29, 1997, p. 8).
That same year, a federal judge in New York dismissed the U.S. Justice Department's antitrust challenge of the merger of two hospital systems in Long Island, N.Y., in part because of the systems' not-for-profit status. He said the systems' community-controlled boards would act as a safeguard against market abuses (Nov. 10, 1997, p. 17). Long Island Jewish Medical Center and North Shore Health System completed their 12-hospital merger less than a month later.
The new study suggests that community boards lose their power to guide an individual hospital's behavior as not-for-profit hospitals merge into larger and larger systems in which regional or national offices set pricing policies.
Ironically, the study in some respects supports one of the most exhaustive studies on the aftereffects of hospital mergers. That study, conducted by the research arm of the American Hospital Association, found that merging hospitals lowered costs and reduced services but kept the money rather than pass savings along to consumers.
MODERN HEALTHCARE reported on the findings in 1993 (Nov. 15, 1993, p. 4). But the study was never published, an AHA spokesman said last week. However, a copy is available from the federal Agency for Health Care Policy and Research, in Rockville, Md., which supported the AHA study with a $350,000 grant.