Martin Gaynor of Carnegie Mellon University, Samuel Kleiner of Cornell University and William Vogt at the University of Georgia offered an alternative to the two most-commonly used methods of defining hospital markets by antitrust authorities. A comparison of all three options, using 1995 California hospital discharge and financial data, suggests methods used previously by enforcement “by and large incorrectly define (geographic) markets,” the economists wrote.
Commonly used models to determine if hospital mergers will create a monopoly overstate the size and competition in markets, the economists said. Hospitals operated with significantly fewer rivals in markets identified by the economists' model.
Mergers threaten to hamper competition in markets where a seller has the clout to raise prices by at least 5% for at least one year. Market clout after the merger, calculated using what's known as the Herfindahl-Hirschmann Index, also factors in a deal's anti-competitive potential.
The economists found the median number of hospitals competing in California markets was three under their model. That's compared with 16 hospitals under one method authorities generally employ and a dozen hospitals under the second commonly used method.
The Herfindahl-Hirschmann Index for hospitals in the economists' model ranked as highly concentrated, but they scored as unconcentrated under methods used in recent unsuccessful antitrust cases.
Their results “illustrate the importance of economic modeling for defining markets, and indicate that reliance on imprecise methods of market definition has the potential to mislead the courts as to the approximate extent of geographic markets,” they said.
Courts in recent years have rejected authorities' anti-competitive claims against hospital mergers, said the economists, who also cited research that found mergers have increased prices without any measurable quality gains.
“While the hospital industry has seen more merger litigation in recent years than any other industry, the courts have denied all but one government request to block hospital mergers since 1994, due largely to the inability of the antitrust authorities to convincingly define a geographic market that supports their case,” they wrote. “In the eight cases brought to the courts since 1994, the primary reason given for denying the government's request in six of these cases centered on the market delineation.”