A Review of the Economic Literature on Cross-Market Health Care Mergers

• Date: 01 June 2019

A REVIEW OF THE ECONOMIC LITERATURE ON

CROSS-MARKET HEALTH CARE MERGERS

K

EITH

B

RAND

T

ED

R

OSENBAUM

*

Several recent studies in the economics literature examine the price effects

of “cross-market” mergers between health care providers in non-proximate

geographies.

1

These studies consider whether such mergers lead to higher

prices even though the providers are not substitutes for patients at the point of

service.

2

Especially when taken together, the empirical analyses in this litera-

ture provide credible evidence that prices have increased following such

mergers.

3

Given these findings, some have suggested that a broadened anti-

trust enforcement agenda may be warranted.

4

In general, recent merger enforcement in this area has focused on whether

the health care providers involved in the merger are substitutes for patients at

the point of service. Therefore, the analysis has primarily focused on whether

a significant amount of patients at one of the parties would divert to the other

party in the event of a network exclusion, and vice-versa.

5

Under this analysis,

* Keith Brand and Ted Rosenbaum are economists at the Federal Trade Commission. The

views expressed in this article are those of the authors and do not necessarily reflect those of the

Federal Trade Commission. We are grateful for comments from editors Nickolai Levin and Na-

than Wilson as well as Dave Balan, Malcolm Coate, Chris Garmon, Paolo Ramezzana, David

Schmidt, Mike Vita, and Brett Wendling.

1

Matthew S. Lewis & Kevin E. Pflum, Hospital Systems and Bargaining Power: Evidence

from Out-of-Market Acquisitions, 48 RAND J. E

CON

. 579 (2017); Matt Schmitt, Multimarket

Contact in the Hospital Industry, 10 A

M

. E

CON

. J.: E

CON

. P

OL

’

Y

361 (2018); Gregory S. Vistnes

& Yianis Sarafidis, Cross-Market Hospital Mergers: A Holistic Approach, 79 A

NTITRUST

L.J.

253 (2013); Leemore Dafny, Kate Ho & Robin S. Lee, The Price Effects of Cross-Market Hospi-

tal Mergers (Nat’l Bureau of Econ. Research, Working Paper No. 22106, 2017) (forthcoming

RAND J. E

CON

.).

2

While some of the theoretical issues we discuss here are also relevant for the combination

of providers providing separate services (e.g., a pediatric hospital and a rehabilitation hospital),

we do not focus on that type of cross-market merger in this article.

3

Dafny et al., supra note 1; Lewis & Pflum, supra note 1.

4

Dafny et al., supra note 1, at 31.

5

In many applications, substitution between suppliers is measured by diversion ratios, which

give the percentage of volume lost by one supplier under a small price increase that would be

533

82 Antitrust Law Journal No. 2 (2019). Copyright 2019 American Bar Association. Reproduced

by permission. All rights reserved. This information or any portio n thereof may not be copied

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Association.

534

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NTITRUST

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[Vol. 82

most cross-market mergers between health care providers in distinct geo-

graphic areas do not raise significant antitrust concerns because there is mini-

mal patient diversion between them.

6

In this article, we first summarize the empirical analyses that economists

have used to test for price effects following the mergers of providers in differ-

ent geographic regions. Second, we outline the main mechanisms that could

explain these findings. We highlight three mechanisms: (1) mergers change

providers’ bargaining sophistication, (2) for some high value services, provid-

ers are substitutes at the point of service for patients over a wider geographic

area than assumed in the cross-market studies, and (3) providers are substi-

tutes for inclusion in an insurer’s network, even if they are not substitutes for

patients at the point of service.

7

Our review finds that some empirical evi-

dence can help distinguish between these mechanisms, but further study is

needed to disentangle these three factors. Likely, this will require a deeper

understanding of how provider and insurer incentives change post-merger.

8

I. EMPIRICAL FINDINGS

A series of recent articles have documented higher hospital prices following

the merger of two hospitals that, at a first glance, are not substitutes for pa-

tients at the point of service.

9

Further, some of this research also documents

higher prices for hospitals that are not direct parties to the transaction after

this type of merger.

10

All of these articles use reasonable control groups in

standard difference-in-differences approaches to identifying merger effects,

captured by another supplier. In health care markets, consumers are largely insulated from the

direct effect of changes in price negotiated between providers and insurers because of insurance.

For example, for some types of health care services, consumers may pay a fixed copayment, as

opposed to a coinsurance rate. Therefore, diversion ratios between providers are usually mea-

sured as the percentage of volume lost by one provider under a hypothetical exclusion from the

network of an insurer that would be captured by another provider. See, e.g., Joseph Farrell, David

J. Balan, Keith Brand & Brett W. Wendling, Economics at the FTC: Hospital Mergers, Author-

ized Generic Drugs, and Consumer Credit Markets, 39 R

EV

. I

NDUS

. O

RG

. 271, 272–73 (2011).

6

Id.

7

Craig Peters also outlines a “recapture effect,” which illustrates how the merger of provid-

ers that are not substitutes for patients at the point of service could affect prices. Craig T. Peters,

Bargaining Power and the Effects of Joint Negotiation: The “Recapture Effect” (Econ. Analysis

Grp. Discussion Paper, EAG 14-3, Sept. 2014), www.justice.gov/atr/abstract-43. While he intui-

tively explains how this mechanism could work in a case of a physician group and a hospital or,

by extension, different types of providers in the same region (i.e., mergers across product mar-

kets), this mechanism is likely less relevant for hospitals in far-flung geographic areas. There-

fore, we do not address this mechanism in this article.

8

Some recent academic literature already touches on these types of issues. See, e.g., Kate Ho

& Robin S. Lee, Insurer Competition in Healthcare Markets, 85 E

CONOMETRICA

379 (2017).

9

Dafny et al., supra note 1; Lewis & Pflum, supra note 1; Schmitt, supra note 1.

10

Lewis & Pflum, supra note 1, at 579.