UF study: hospital mergers not necessarily more costly for patients

October 9, 2003

GAINESVILLE, Fla. — Big corporate mergers can be the healthy choice for patients’ wallets, according to a new University of Florida study, which found that hospital consolidations often lead to lower prices.

“Normally, there is a perception that when hospitals merge, there is an immediate increase in the price of inpatient care because of greater market concentration,” said Sourav Chatterjee, who did the research for his doctoral dissertation in economics at UF. “These results show that is not necessarily true. In fact, in the majority of cases, a merger, by itself, usually does not lead to an increase in the price.”

In spite of regulators’ concerns about consolidations bringing higher prices and lower quality of care, the study found mergers can improve efficiency through combined operations, savings on administrative expenses, better management and elimination of duplicate equipment, he said.

“We should be cautious – but certainly not panicky – when we see hospitals consolidate, because more often than not there might be unforeseen benefits to consumers,” Chatterjee said.

Hospitals underwent a flurry of mergers and acquisitions during the 1990s, with more than 45 percent of U.S. hospitals involved in such consolidations between 1990 and 1998, he said.

The UF study examined the effects of different types of mergers and acquisitions on the price of inpatient hospital care in Florida – one of the most active markets for consolidation – between 1993 and 1997, when a record 68 transactions involving 133 hospitals took place. The sample consisted of all 209 privately, local-government or state-owned acute-care hospitals in the state, including mergers involving UF-affiliated Shands hospitals in Gainesville and Jacksonville.

Chatterjee found the effects of hospital mergers vary depending on the type of consolidation, and they differ across specific hospital services, such as caesarians.

Chatterjee’s research differed from other studies in that it looked not just at overall hospital costs, but also at charges for different medical procedures, said Steven Slutsky, a UF economics professor who supervised his research.

“In addition, he found something else very intriguing: that there was a significant difference in what happened to prices between the acquiring hospital in a merger and a hospital that was taken over,” he said. “Very commonly, prices at acquiring hospitals went down and those at hospitals that were acquired went up. This means that when policy makers or the Justice Department looks at mergers, they have to be very careful not to lump everything together but to consider different parts of the market.”

Unlike in many other industries, after a merger two hospitals physically still exist and continue reporting revenue, expenditure and inpatient admission separately, Chatterjee said, which is why there may be different prices at each both before and after a merger.

Chatterjee compared the average price charged for similar services by hospitals that had recently merged with those that had not, using two classification systems: the diagnostic related group, or DRG, for individual medical procedures, and the major diagnostic categories, or MDC, that lumps closely related DRGs into one group of related services.

For example, he looked at 10 frequently used procedures, including caesarian sections and cardiovascular surgeries. The broader classification MDC system included groupings of procedures, such as diseases and disorders of the digestive system, nervous system and circulatory system.

In addition, he compared the average overall price charged by hospital, using hospital balance sheets and other financial data from the Florida Hospital Association. He used hospital revenue and divided it by the total number of inpatient hospital days to get a measure of price of inpatient hospital care.

Mergers between two independent hospitals from the same area – which typically occurred among smaller-sized hospitals – resulted in lower prices for inpatient care for every procedure except normal deliveries of babies, said Chatterjee, who now works for National Economic Research Associates, a private economic consulting firm in Los Angeles.

One reason may be that such mergers allow smaller hospitals to consolidate some of their other operations, as well as spread their fixed costs over a greater number of patients, which brings their average costs down, he said.

“When two independent hospitals decide to merge, that has very different implications than when a large hospital system decides to take over another hospital system,” he said.

Hospitals that were part of a system that acquired other hospitals whether in the same area or outside also charged less for various procedures after consolidation, he said. However, hospitals acquired by a hospital system generally experienced an increase in prices, Chatterjee said.

At the hospital level, he found no evidence that merging hospitals charge more after a merger than do nonmerging hospitals, he said.

“Many policy makers were concerned that the increased merger rate in the 1990s was an attempt by hospitals to maintain market power in the face of managed care companies, which were trying to negotiate lower prices,” said Vivian Ho, an associate professor of health-care organization and policy at the University of Alabama in Birmingham. “Dr. Chatterjee’s research indicates instead that these mergers were an attempt by hospitals to achieve cost efficiencies, which they passed on to the patient in terms of lower prices. Market consolidation may have prevented health-care costs from rising even further in the Florida market.”