Matt Schmitt’s research shows hospital prices rise after acquisitions, even where local competition is unchanged
With health care costs rising and merger activity between hospital systems strong, antitrust regulators frequently scrutinize deals that would reduce the number of competing hospitals within a geographic area. The Federal Trade Commission often requires these buyers in turn to sell specific hospitals where the combined company would dominate the markets, as it did in Community Health Systems' $7.6 billion acquisition of Health Management Associates in 2014. The FTC noted that a complete merger would give Community Health Systems a "near monopoly" position for its hospitals in certain parts of Alabama and South Carolina, forcing Community to sell facilities in those locations to gain approval for the deal.
In theory, these forced divestitures keep price competition healthy even as the overall number of players shrinks. But new research by UCLA Anderson's Matt Schmitt suggests that hospital system mergers may lead to higher prices regardless, even in places where local competition is unchanged. The study is forthcoming in the American Economic Journal: Economic Policy.
Schmitt's findings suggest that companies are less competitive when they face each other in multiple markets. Economists have long suspected that multiple market competition dampens normal price competition, but the theory has proven difficult to test.
Cutting U.S. health care costs — a goal considered critical for sustaining good care and a healthy economy — will be particularly challenging if, as Schmitt's work implies, hospital costs rise as hospital systems grow. Owing to rapid industry consolidation in recent years, hospital chains that compete simultaneously in numerous markets are growing more common. Continued hospital mergers may produce higher health care costs, even when there is no geographic overlap in the two companies' properties for the FTC to protest, the findings suggest.
Medical expenditures in the U.S. totaled $3.2 trillion in 2015, with costs for hospital care making up about a third of the total, according to the Centers for Medicare and Medicaid Services. In 2016, the U.S. health care system continued to rank as the most inefficient in the developed world, costing 17.1 percent of GDP, according to World Bank rankings of expenditures by country. By comparison, Europe's high spenders, Switzerland and France, paid 11.7 percent and 11.5 percent of their own GDP, respectively.