Hospital Mergers with Regulated Prices

AuthorOdd Rune Straume,Luigi Siciliani,Kurt R. Brekke
Published date01 July 2017
DOIhttp://doi.org/10.1111/sjoe.12191
Date01 July 2017
Scand. J. of Economics 119(3), 597–627, 2017
DOI: 10.1111/sjoe.12191
Hospital Mergers with Regulated Prices
Kurt R. Brekke
Norwegian School of Economics, NO-5045 Bergen, Norway
kurt.brekke@nhh.no
Luigi Siciliani
University of York, YO10 5DD York, UK
luigi.siciliani@york.ac.uk
Odd Rune Straume
University of Minho, 4710-057 Braga, Portugal
o.r.straume@eeg.uminho.pt
Abstract
We study the effects of a hospital merger in a spatial competition framework where semi-
altruistic hospitals choose quality and cost-containment effort. Whereas a merger always
leads to higher average cost efficiency, the effect on quality provision depends on the
strategic nature of quality competition, which in turn depends on the degree of altruism and
the effectiveness of cost-containment effort. If qualities are strategic complements, then a
merger leads to lower quality for all hospitals. If qualities are strategic substitutes, then a
merger leads to higher quality for at least one hospital, and might also yield higher average
quality provision and increased patient utility.
Keywords: Antitrust; cost efficiency; hospital mergers; quality competition
JEL classification:I11; I18; L13; L44
I. Introduction
The hospital industry has undergone substantial consolidation during the
last decades, both in the USA and in Europe.1The stated motives for hos-
pital mergers are that they facilitate efficiency gains, and that they enhance
the quality of care. However, there is a growing concern that the continu-
ing consolidation might increase market power in the hospital industry, and
We appreciate comments from two anonymous referees. O. R. Straume is also affiliated
with NIPE and with the Department of Economics, University of Bergen, and acknowledges
funding from the project COMPETE: POCI-01-0145-FEDER-006683, with financial support
from the FCT/MEC through national funding and from the ERDF through the Operational
Programme on “Competitiveness and Internationalization – COMPETE 2020” under the
PT2020 Partnership Agreement.
1A description of the consolidation and corresponding changes in concentration in the US
and UK hospital markets can be found in the recent survey by Gaynor and Town (2011).
CThe editors of The Scandinavian Journal of Economics 2016.
598 Hospital mergers with regulated prices
thereby lead to adverse effects for patients through lower quality of care.2
Whereas, in the past, governments tended to encourage consolidation, and
antitrust authorities approved most of the hospital mergers, recently there
has been a clear tendency towards a more strict regulation of hospital
mergers. In 2009, the UK government established the Cooperation and
Competition Panel (CCP) with the authority of approving National Health
Service (NHS) hospital mergers. In January 2013, for the first time, the
Office of Fair Trading (OFT) referred a merger of two NHS foundation
trusts to the Competition Commission stating the following.3
“The evidence before the OFT is that the merger would combine two trusts
that compete closely for GP referrals for many specialties and it is likely
that the merger would result in few realistic alternative providers for patients
and NHS commissioning groups.
As a result, the OFT could not dismiss concerns that in several medical
specialties [ ...] themergermightreducethehospitals’incentives tocontinue
to enhance the quality of those services over the minimum required standards
and would result in less choice for commissioners wishing to reorganise
services.”
What do we know about the effects of hospital mergers on quality and
cost efficiency? Not much. The empirical literature is very limited and the
overall picture emanating from the few existing studies is rather inconclu-
sive. Furthermore, to our knowledge, there is no comprehensive theoretical
analysis of merger effects on quality and cost efficiency in hospital markets
under price regulation. Given the growing real-world importance of hospi-
tal mergers, this is clearly an important void in the literature, as standard
merger analyses cannot be directly applied to the case of hospital mergers,
because of institutional and behavioural idiosyncrasies.4
The aim of the present paper is to contribute towards filling this void.
We ask the following questions. How does a hospital merger affect the
merging hospitals’ incentives for quality and cost containment? How do
competing hospitals respond to the merger? Do the effects of a merger
depend on whether or not the merger involves hospital closure? What are
2For example, the merger simulations by Beckert et al. (2012), using data from the NHS in
England, show that merging hospitals’ demand would become substantially less sensitive to
quality after the merger. This would lessen competition and might have adverse effects on
patients.
3See http://webarchive.nationalarchives.gov.uk/20140402142426/http://www.oft.gov.uk/news-
and-updates/press/2013/01-13/.
4In most OECD countries, hospitals face regulated prices and compete only on quality.
Furthermore, it is widely recognized in the health economics literature that the standard
paradigm of profit maximization does not necessarily apply to health-care providers, who
tend to have somewhat broader objectives.
CThe editors of The Scandinavian Journal of Economics 2016.

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT