Price Effects of Cross-Market Hospital Mergers

We examine how mergers of healthcare providers across distinct geographic or service markets might lessen competition to be included in insurers' networks and therefore lead to higher negotiated prices. Using a theoretical bargaining framework, we show that merging providers that are not direct substitutes at the point of care can still increase their prices following a merger if a "common customer" (individual, household, or employer) values both of the merging providers, and if this value affects the customer's choice of insurer. We also provide conditions under which the presence of a "common insurer" negotiating with the merging providers (even absent a common customer), is sufficient to generate a price effect. Using two distinct samples of acute-care hospital mergers over the period 1996-2010, we compare the price trajectories of three groups of hospitals: (1) hospitals acquiring a new system member in the same state, but not the same geographic market ("adjacent treatment hospitals"); (2) hospitals acquiring a new system member out of state ("non-adjacent treatment hospitals"); (3) hospitals subjected to neither treatment. We address the concern that hospital transactions are not random by focusing on hospitals that were arguably not the driver(s) of a given transaction, either because the transaction was likely motivated by within-market overlap in another market (such that the transaction was challenged by the FTC) or because the hospital was not among the "crown jewels" of the system being acquired. We find that adjacent treatment hospitals raise price by more than 10 percent relative to control hospitals, while non-adjacent treatment hospitals make no statistically significant changes in price. These findings suggest that the combination of the "common customer" and "common insurer" effects is positive and sizeable. We conclude that cross-market, within-state hospital mergers may increase hospital systems' market power when bargaining with insurers.