What little is left of hospital antitrust enforcement in the U.S. got a boost earlier this month with the release of a new study that found that merged hospitals generally don't deliver on promised savings.
Specifically, the study said the newly merged hospitals may not achieve the cost and price savings such deals are often expected to generate largely because of local market conditions.
"I don't think (the study) results are surprising," said David Balto, a former policy director of the Federal Trade Commission's Bureau of Competition. "It's very hard to achieve these efficiencies, and often these mergers lead to near monopolies. In those settings, there's little expectation that cost savings will be passed on."
The last hospital merger challenged by the FTC was in the summer of 1999, when the agency unsuccessfully attempted to block a deal between the only two acute-care hospitals in Poplar Bluff, Mo.
Merging hospitals often make promises of cost reductions and price moderation to justify their high-market-share consolidations to state and federal antitrust regulators. They argue that those benefits to the consumer outweigh any potential anticompetitive effects of their proposed union.
While the new merger study found that increases in cost and price are lower overall among merged hospitals than among nonmerged hospitals, a lack of competition in a market, often caused by the merger itself, can dramatically lower the cost and price savings of the merger.
For example, costs per adjusted admission at merged hospitals rose 22.5% from 1989 through 1997 vs. 32.6% at nonmerging hospitals-a 10.1 percentage point differential, according to the study, which was sponsored by a grant from HHS' Agency for Healthcare Research and Quality and published in the July/August issue of Health Affairs. But if a particular market had fewer competitors, that differential dropped to 5.4%, suggesting that less overall competition negated the need for merged hospitals to control costs to the same extent (See chart).
The same pattern held true for increases in hospital prices. According to the study, prices per adjusted admission at merged hospitals rose 19.7% from 1989 through 1997, vs. 27.5% at nonmerging hospitals-a 7.9 percentage point differential. But in a market with fewer competitors, that differential dropped to 6.7 percentage points.
"Merger-related cost and price savings exist, but the presence and extent of these savings vary based on market and hospital conditions," the researchers said. "These savings appear to be the highest in competitive markets and also when low-occupancy, nonteaching or nonprofit hospitals merge."
The study analyzed changes in costs and prices from 1989 to 1997 for 204 hospitals involved in mergers, 653 competing hospitals and 910 nonmerging, nonrival hospitals. Unlike previous studies, authors said, the AHRQ analysis separated nonmerging hospitals into rival and nonrival categories to provide a more accurate assessment of the competitive landscape that can affect prices and costs.
"Our hospital enjoys an overall average cost of capital that is lower than when we were a stand-alone institution," said David Covert, president and chief administrative officer of 149-bed Chandler Regional Hospital near Phoenix. The hospital merged with Catholic Healthcare West in December 1999 in a deal valued at approximately $120 million.
Chandler Regional, which operates in a market with a high degree of managed care, has instituted "routine" price increases since the merger, Covert said, but he was unsure if the amount of those increases would have been different if the merger had not been completed. He does believe joining forces with CHW has "done a great job of leveraging our market position here."
Gloria Bazzoli, co-author of the new AHRQ study, was the lead researcher of a 1993 American Hospital Association analysis that reached a different conclusion. That study, also sponsored by the AHRQ, said hospital costs decrease as a result of market consolidation. At that time, the AHA was lobbying for antitrust relief for hospitals.
In her earlier work, Bazzoli argued that mergers enable hospitals and other network providers to enhance efficiency and put resources to better use. In 1993, she told Modern Healthcare hospitals that join networks should have lower costs and be able to reduce excess acute-care capacity.
Both of her studies, Bazzoli said last week, confirm that "cost savings vary markedly across different types of hospitals in different markets . . . some (merged) hospitals have higher cost savings and others have lower."
One of the central implications of her work, Bazzoli said, is that "antitrust enforcers have to be very careful and pay close attention to hospitals that merge because based on circumstances among the institutions that merge, results can vary quite a bit."