Consolidation and Efficiencies: Another Look at the Evidence
Dranove, D., and R. Lindrooth
The introduction of the Medicare Prospective Payment System
in 1983, followed by the rapid growth of managed care among
privately insured individuals, have placed enormous fiscal
pressure on hospitals. Dranove et al. (2001) show that hospitals
responded to this pressure by consolidating with local competitors.
Hospital executives hope that consolidation generates efficiencies.
the empirical evidence on consolidation efficiencies is mixed,
and the research methods have been inconsistent. In this paper,
we reconcile these findings using improved methods and up-to-date
data. We describe fundamental distinctions between system
acquisitions and mergers to explain why we might expect different
results. At the same time, we use a unified empirical methodology,
so that we may directly compare results for systems and mergers.
Our methods attempt to address many problems overlooked in
previous studies. Based on estimates of a multi-product cost
function, we find that hospitals that form systems do not
enjoy any measurable cost reductions. However, mergers that
lead to closure (or conversion) of one of the inpatient facilities
offer considerable savings - our point estimate is about -7.5
percent. However, mergers that do not lead to closures appear
to increase costs, by an estimated 4 percent. Overall, our
findings suggest that hospital consolidation does not, in
general, lead to cost reductions.
Consolidation and Effeciencies: Another Look at the Evidence
(PDF: 969 KB)