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Hospital Consolidation and Efficiencies: Another Look at the Evidence
Dranove, D., and R. Lindrooth

Abstract: 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.

Thus far, 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.

Hospital Consolidation and Effeciencies: Another Look at the Evidence (PDF: 969 KB)

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