The incentives and effects of hospital mergers under managed care: Theory and evidence

This dissertation examines how managed care may affect the incentives and effects of hospital mergers. A spatial game-theoretic model is developed to explain hospital merger incentives and outcomes under different market conditions. Specifically, the focus is on two market conditions: managed care market share and antitrust policies, which are of major importance to the hospital industry given its substantial consolidation and the growing dominance of payers in recent years. A unique nationwide sample of hospitals from the American Hospital Association reports mergers and other restructuring activities each year from 1988 to 1995, which provides a natural experiment for studying hospital's reactions to changing market conditions.;A “difference in differences” method is also developed to analyze changes in hospital service arrays, staffing, cost, price, and profit margins after merger in both merged and controlled hospital groups. Improvement has been made on the study design of hospital mergers. Specifically, a before/after and merger/control sample is constructed. A bootstrapping procedure is developed to estimate the differences in the merged and control hospital groups.;In relation to the influence of HMO on hospital mergers, it is found that the forces encouraging more efficient hospital behavior dominate in empirical analysis of the high HMO market: cost increases per adjusted patient day of merged hospitals are significantly slower than nonmerged control group. Price, as measured by net patient revenue per adjusted patient day, has increased at a lower rate in merged hospitals. New evidence are found that merged group on average have higher cost per adjusted patient day and higher number of medical staffing per adjusted patient day and more high tech service provision may have contributed to this higher cost.;Overall, my findings suggest that antitrust policy must take into account the potential countervailing effects of managed care on increased hospital market power through merger and also how the community might be affected if a proposed hospital merger is thwarted.