Quality effects of hospital mergers: Is it market power that matters

Over the last twenty years, the hospital industry has undergone fundamental changes. The shift away from cost-based reimbursement forced hospitals to emulate traditional firms. Another change has been the unprecedented industry-wide consolidation, largely unchallenged by the Federal Trade Commission and the Department of Justice. These regulatory agencies stated position has been that the transactions were a response to fundamental industry shocks. Therefore, large numbers of mergers and acquisitions have occurred with little investigation of the possible effects on quality of care.; One persistent difficulty of assessing the relationship between competition and patient welfare is the combination of price and quality competition observed in the market. The fixed-price per admission paid by Medicare allows definitive welfare effects of mergers to be observed for a group of patients. Discharge data from Florida Medicare admissions provided an opportunity to observe post-merger quality effects on three quality measures: mortality, complication rate and the rate of home discharge.; In our theoretical model, with two payers and quality as an independent objective, mergers may lower quality either through a cross-elasticity effect or through a change in the hospital's objectives. Mergers may increase quality through either a spillover effect from increased prices for non-Medicare payers or through efficiency gains. Out-of-market and within-market mergers have different potential effects due to their implications for market power.; Using Cox Hazard models for mortality and home discharge and a probit model for complications, we observed disparate effects on quality. Out-of-market mergers showed evidence of decreased quality of care received by patients in the likelihood of complication and the likelihood of home discharge, while within-market mergers showed some evidence of increased quality in all three quality measures. These results were consistent under two geographic market definitions and in a lagged-effects model.; These findings are in contrast to the stated government policy of focusing intervention efforts solely on mergers occurring in highly concentrated markets. Mergers that occur across geographic markets appear to negatively impact patients. Mergers within markets may improve Medicare patient welfare, although it may be at the cost of non-Medicare patient welfare if price increases outweigh quality improvements.