Schmitt (2017) found evidence that multi-market contact in the US hospital industry has led to higher hospital prices. This suggests that even if future hospital consolidation only has a marginal impact on within-market concentration, it may still produce higher prices.
Picture by National Cancer Institute, Unsplash
How consolidation reshaped the US hospital industry
The US hospital industry has witnessed significant consolidation since the start of the 21st century. According to the American Hospital Association, from 2000 to 2010, for example, approximately 60 hospital mergers occurred annually; this figure rose to nearly 100 mergers per year between 2011 and 2014.
The rapid consolidation of the US hospital industry has affected hospital competition in two major ways:
Increased within-market concentration: Within each hospital market — typically defined as a geographic region — there has been a drop in the number of hospitals competing against each other. The proportion of hospital referral regions (HRRs) exhibiting high concentration, for example, as defined by the US Horizontal Merger Guidelines (2010), has risen from 43% in 2000 to 58% in 2012.
Rise in multi-market contact: As multihospital organisations became more prominent, hospital companies increasingly competed in multiple geographic markets. In 2012, for example, 29% of HRRs had no multi-market contact at all, compared to over 40% in 2000.
Schmitt (2017) specifically focused on the impact of multi-market contact on hospital prices, and prices were estimated using data on average hospital revenues.
Multi-market contact as a hindrance to competition
Multi-market contact can hinder competition because it can foster collusion between firms. After all, when firms compete in multiple markets, they may hesitate to engage in vigorous competition in a specific market, out of fear that their rival will retaliate by intensifying competition in all the other markets they compete in. Consequently, even in the absence of an explicit (and illegal) agreement between competitors, firms may choose to keep prices higher than they would have under vigorous competition.
There already exists empirical evidence that multi-market contact can lead to higher prices. Evans and Kessides (1994), for example, found that airline fares are significantly higher on routes where there exist carriers that have contracts on several routes. But not all arguments agree that multi-market contact hinders competition; Berheim and Whinston (1990), for instance, showed that when firms and markets are perfectly symmetric, multi-market contact doesn’t change the incentives to collude. As a result, whether a higher degree of multi-market contact in the US hospital industry has produced less competitive prices, is ultimately an empirical question.
A simplified overview of the paper’s methodology
A difficulty with estimating the price impact of multi-market contact is that companies may choose to acquire the hospitals which they expect to have the greatest price rises in the future. Consequently, elevated post-merger prices in these hospitals could be driven by hidden market-specific drivers different from multi-market contact. Unless addressed, such an endogeneity problem can prevent the estimation of the causal effect of multi-market contact on hospital prices.
Schmitt (2017) dealt with the endogeneity issue by only estimating the price effect of multi-market contact on hospitals that were not themselves part of the merger, or within the market where the merger happened, but still belonged to the merged multihospital system. This way, the paper excluded from its analysis any a priori company expectations about the merged hospitals’ future prices. And in the simplest version of their model, they used the fixed effects regression below, where λ attempted to capture the causal impact of multi-market contact on hospital prices.
Some evidence of anti-competitive pricing
In the simplified version of their model, Schmitt (2017) estimated that multi-market contact over the 2000-2010 period raised prices by almost 7%, and the results were supported by various robustness checks. This suggests that regulators should not only focus on the impact of hospital mergers on within-market concentration but also on its impact on cross-market hospital interactions.
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