| The increase of hospital mergers and consolidations in the 1990s has raised concerns about hospital market power. Some mergers have significantly lessened competition and caused a sharp increase in insurance premiums and hospital prices; therefore, it is important to evaluate the impact of proposed mergers. The standard market power analysis starts with the geographic market area delineation based on the patient flow criteria. Given patient and hospital heterogeneity, this method tends to overstate the market area and consequently underestimate the merger's potential anti-competitive effects. In this dissertation I evaluate a new methodology, the Willingness-to-Pay (WTP) method for measuring hospital market power. This method uses conditional logit models of patient choice to estimate the additional contribution of a hospital to patients' utility; in other words, it measures the net benefit of a hospital to the community. Two Nash bargaining models are developed to show that post-merger WTP increase leads to corresponding changes in prices. I then use merger cases in Florida and New York State to evaluate the model's within-sample robustness and the reliability of its out-of-sample predictions. I find that this method provides reliable predictions of patients' post-merger willingness-to-pay that imply conservative post-merger price increase. In the last chapter, I adopt this method in the comparative review process of Certificate-of-Need (CON) applications. The WTP method can help choose among different proposals by simulating the welfare effects and price impacts caused by different new hospitals. Some proposals, however, can not be distinguished by the WTP method alone. More information on the efficiency of the proposed programs and the quality of care is required if we are to make a further selection. |
