Antitrust Policy and Hospital Mergers: Recommendations for a New Approach
| Author | Cory S. Capps,Shane Greenstein,David Dranove,Mark Satterthwaite |
| Date | 01 December 2002 |
| Published date | 01 December 2002 |
| DOI | 10.1177/0003603X0204700407 |
| Subject Matter | Economic |
The Antitrust BulietinlWinter 2002
Antitrust
policy
and
hospital
mergers:
recommendations
for
a
new
approach
BY CORY S. CAPPS,* DAVID DRANOVE,**
SHANE GREENSTEIN** and MARK SATTERTHWAITE**
I.
Introduction
677
During the 1990s, there were
over
900 hospital mergers and acqui-
sitions, many involving hospitals in the same metropolitan areas.'
These transactions consolidated the hospital industry, dramatically
concentrating the supply
of
hospital services. In principle, several
purposes motivated this consolidation. First, consolidation might
* U.S. Department of Justice and Kellogg School of Management,
Northwestern University.
** Kellogg School of Management, Northwestern University.
AUTHORS' NOTE: The views expressed herein are the authors'
and
not
necessarily those
of
the Department
of
Justice.
Irving Levin
Associates,
a
health
care
research
company that
tracks hospital mergers, reports 1042 hospital mergers and acquisitions
between Jan. 1, 1993 and Jan. 1, 2001. Nine hunred forty-four of these
transactions were valued at
over
$10 million. Note, however, that the
1042 transactions include hospitals involved in multiple transactions. See
http://www.levinassociates.com/.
©2003 by Federal Legal Publications, Inc.
678
The antitrust bulletin
have facilitated the elimination
of
excessive beds and services. By
the
end
of
the 1980s, the average hospital capacity utilization rate
had
fallen
to 60%.2
Indeed,
eliminating
excess
capacity!
or
duplicative services was a stated goal
of
many hospital mergers.s
This
consolidation
also
appears
to be a
direct
response to the
simultaneous growth of managed care> and the shift to outpatient
care in the 1980s and 1990s.
Merging hospitals rarely mention asecond plausible motive,
namely, to
enhance
market power with respect to managed care
organizations
(MCOs).
MCOs
obtain
discounts
from
hospitals'
stated charges by threatening to steer patients to alternative hospi-
tals offering more favorable pricing. To make this threat credible,
preferred
provider
organizations
(PPOs)
generally
charge
enrollees higher co-payments
if
they visit anoncontracting hospi-
tal, while health maintenance organizations (HMOs) usually pro-
vide no coverage at all for nonemergency care at noncontracting
providers.
This
threat
enables
MCOs
to
play
hospitals against
each other to extract larger discounts. By consolidating, hospitals
can
limit the ability
of
MCOs to steer patients, and thereby resist
MCO
demands
for
discounts.
Despite
the
potential
for
consolidation
to
enhance
market
power, the Federal Trade Commission (FTC) and "Department
of
Justice
(DOJ)
have
challenged
only
a
handful
of
hospital
2Statement
of
the American Hospital Association Submitted to the
Federal
Trade
Commission, March 25, 1996, at 1111, at
www.ftc.gov/
opplglobalJamhospas.htm.
"Hospitals are searching for ways to reduce excess capacity, oper-
ate more efficiently, and realign the services they provide to their com-
munities.
Frequently,
this
involves
mergers
or
other
joint
activity
between competitors," id.
1112.
4
Hospital
administrators
found
it
difficult
to actually eliminate
duplicative
services.
See
Jay
Greene,
Do
Mergers
Work?,
MODERN
HEALTHCARE,Mar.
19,
1990,at24-36.
See
David
Dranove,
Carol
J.
Simon
&
William
D. White, Did
Managed Care Lead to Increased Provider Consolidation?,
HEALTH
SER-
VICES
RES.
(forthcoming).
Hospital mergers
679
mergers." In the 1980s, the government prevailed in all
but
one
case, in Roanoke, Virginia." This situation dramatically reversed
in
the
1990s. After
winning
an
injunction
on
appeal
in
circuit
court in Augusta, Georgia.s the
FIC
and
DOl
lost six successive
cases.
These
losses accumulated in
district
court,
circuit
court,
and in one instance, before an FTC administrative law
judge.
In
all but one case, the definition
of
the
relevant
geographic market
played
a
key
role
in
the
outcome.
The
various
courts
began
accepting
hospitals'
claims that the
relevant
geographic
market
was quite large. In one case, hospitals
over
80 miles away were
ruled to be in the relevant market.
Hospitals
justified
the inclusion
of
distant
hospitals in
their
geographic markets through analyses
of
patient
flow data. Using
an approach for geographic market
definition
first
advocated
in
Elzinga and Hogarty." merging hospitals presented evidence that a
nontrivial
proportion
of
local
residents-usually
in
excess
of
25%-traveled
to distant hospitals.
The
courts
reasoned
that
if
many local patients
traveled
prior to a merger, then
even
more
patients would travel if the merged hospitals raised prices. Thus,
the courts surmised that merging
hospitals
could
not
profitably
raise prices.
There are well-known problems inherent in using patient flows
to define geographic markets. Generally,
there
is no theoretical.
link between patient flows and the presence or absence
of
market
6For the period from 1981 to 1993,
of
397 mergers the DOJ and
FTC jointly challenged 4%. James E. Magleby, Hospital Mergers
and
Antitrust Policy: Arguments Against aModification
of
Current Antitrust
Law, 41
ANTIlRUST
BULL.
137,
1460.50
(1996).
United States v. Carilion Health System, et aI., 707 F. Supp. 840
(W.O. Va. 1989), aff'd, 892 F.2d 1042 (4th Cir. 1989).
FTC v. University Health, Inc., 115 F.T.C. 880 (1992) (consent
order); 1991-1 Trade Cases 69,400 (S.D. Ga.) and 1991-1 Trade Cases
69,444 (S.D. Ga.), rev'd, 938 F.2d 1206 (11th Cir. 1991).
Kenneth G. Elzinga &Thomas F. Hogarty, The Demand
for
Beer,
54
REV.
Ecox, &
STAT.
195 (1972).
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