Short Take

Do Hospital Mergers Really Cut
Health Care Costs?

Matt Schmitt finds that size and location help determine how much, if any, costs fall after deals

More than 2,500 U.S.hospitals were involved in mergers or takeovers between 2000 and 2015, and ongoing consolidation is expected to keep antitrust regulators busy for years. To gain regulatory permission for these deals, almost all buyers claim that their plans lead to lower hospital operating costs. The Federal Trade Commission, charged with preserving competitive pricing, generally views these claims favorably when adequately substantiated; all else equal, lower costs should translate into lower prices for insurers and patients.

But evidence of systematically lower costs among merged hospitals has been tough to find. Despite the pace of takeovers, hospital costs have never been higher. They have risen along with the nation's overall health care bill, which in 2014 was more than 10 times the total in 1980, according to the Centers for Medicare and Medicaid Services. Historically, academic research has been unable to prove that mergers systematically make providing hospital services less expensive. And many of the studies have become outdated in the wake of advances in technology, the enormous growth of hospital chains and other industry changes that make today's hospital mergers unlike those of the past.

UCLA Anderson's Matt Schmitt steps into this debate with a modern approach to the research. In a study recently published in the Journal of Health Economics, Schmitt illustrates how today's more common multi-hospital system mergers have different consequences for hospital costs than traditional mergers between independent hospitals. The research also demonstrates that geographic overlap, where the merging hospitals share a market, leads to little if any cost savings.

Schmitt starts with a comparison of four-year cost trends at hospitals that did and didn't merge between 2000 and 2010, years in which the size of acquirers ballooned with the popularity of multi-hospital corporations. During that period, hospitals that would remain unacquired, a control group, had similar cost trends as those that would later participate in mergers.

Then, on average, acquired hospitals realized cost savings of 4 percent to 7 percent in the years following an acquisition, according to Schmitt's core findings. The additional savings at target hospitals were likely not a result of changes in services offered or the mix of patients following the merger.

Bigger acquirers were able to wring bigger savings out of purchased hospitals, the study states. The biggest acquirers, chains of 51 or more hospitals, lowered costs at their target hospitals about 7.5 percent in years following the mergers. Costs at hospital systems with fewer than 10 facilities saw 3.4 percent cost reductions. And independent hospitals saw little or no difference in costs at their newly acquired facilities.

Big acquirers are not necessarily better than independents at lowering costs, Schmitt explains in the study. Rather, he notes, differences in the rationales for making acquisitions may drive the savings discrepancies.

Independent buyers were much more likely than health care systems to buy hospitals that were direct competitors, perhaps to increase local market share. Alternatively, about three-quarters of the hospitals purchased by multi-hospital systems were in markets outside of any county where the system already operated. Perhaps more obvious cost-cutting possibilities made these properties attractive, Schmitt suggests.

To illustrate this effect, Schmitt compares cost savings for in-market versus out-of-market acquisitions. Out-of-market acquisitions, regardless of the size of the buyers, consistently resulted in post-merger cost savings. In-market acquisitions rarely achieved cost savings, the study finds.

Schmitt, M. (in press). Do hospital mergers reduce costs? Journal of Health Economics.

Matthew Schmitt

Assistant Professor of Strategy

Matthew Schmitt is a health and industrial organization economist whose research examines competition and antitrust issues in health care markets, an area of growing policy interest. Schmitt's current projects include studies of competition between multihospital systems, cost savings from hospital mergers, copayment coupons for prescription drugs and "reverse payment" patent settlements.

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