Cost Reductions or Reputation Enhancements as Motives for Mergers: The Logic of Multihospital Systems

This paper examines two motives for the formation of local multihospital systems: cost reduction and reputation enhancement. Systems may reduce costs by eliminating redundancies and reducing administrative costs. Integration may also lower costs for consumers seeking consistently high qualiiy. We hypothesize that if systems achieve either cost or reputation benefits, then member hospitals will look different from random collections of hospitals. We find that local systems do not appear to have lower costs but do appear to enjoy reputation benefits over nonsystem hospitals. Our findings challenge the assumptions behind popular health reform initiatives.