Hospital industry representatives and community leaders have argued that hospital mergers could provide benefits through improved service coordination, reduced excess capacity, and increased ability to accept risk-based payment. Recent statements by an FTC Commissioner and recent court decisions in 2 highly concentrated hospital markets suggest an increased willingness to accept hospital arguments about potential consumer benefits accruing from merger. Many within the antitrust enforcement agencies, however, continue to maintain that the detrimental effects of increased market power resulting from merger are likely to dominate any beneficial effects. The highly charged debate about hospital antitrust is fueled by the growing interest among hospital executives and trustees in consolidation strategies given growing financial pressures within the industry. The proposed study addresses two fundamental questions: (1) to what degree and under what circumstances have prior hospital mergers generated efficiency gains; and (2) who benefits from hospital mergers --consumers in terms of lower hospital prices, hospitals in terms of higher profits, or both. The unique contribution of our proposed research is the application of a comprehensive approach that has been applied by industrial organization researchers to study mergers in other concentrated industries, such as air travel and banking. Specifically, we examine cost, price, and profit changes for merging hospitals and for rival firms affected by merger. While other economists are beginning to look at merged hospitals, a unique contribution of our research is the analysis of rival hospital actions. In addition, we study the potential intervening influences of ownership status and financial condition on merger cost, price, and profit effects. Finally, the proposed study utilizes unique data available to us on hospital restructuring after merger to better identify how merger cost-savings are generated. In all, the study provides a comprehensive and in-depth understanding of what happens to markets affected by merger and thus, a body of critical knowledge to assist policy development and health care management.
