Hospital consolidation and negotiated PPO prices

Health Affairs

Volumn 23, Issue 2, 2004, Pages 175-181

  Capps, Cory ^a   Dranove, David ^b  

^a NORTHWESTERN UNIVERSITY   (United States)

^b NORTHWESTERN UNIVERSITY   (United States)

Author keywords

[No Author keywords available]

Indexed keywords

ARTICLE; HEALTH CARE COST; HEALTH INSURANCE; HOSPITAL; HUMAN; MANAGED CARE; MARKET;

EID: 1842729491     PISSN: 02782715     EISSN: None     Source Type: Journal    
DOI: 10.1377/hlthaff.23.2.175     Document Type: Article

References (22)

1. See C. Capps et al., "Antitrust Policy and Hospital Mergers: Recommendations for a New Approach," Antitrust Bulletin (Winter 2002): 677-714. From 1995 to 1999 there were more than 100 hospital consolidations per year.
2. David Dranove and Richard Lindrooth find evidence that mergers in which hospitals operate under a single license generate substantial savings, but system formation, in which hospitals keep their licenses, do not. D. Dranove and R. Lindrooth, "Hospital Consolidation and Costs: Another Look at the Evidence," Journal of Health Economics 22, no. 6 (2003): 983-997.
3. These studies include M. Noether, "Competition among Hospitals," Journal of Health Economics 7, no. 3 (1988): 259-284; M. Staten, J. Umbeck, and W. Dunkelberg, "Market Share/Market Power Revisited: A New Test for an Old Theory," Journal of Health Economics 7, no. 1 (1988): 73-87; G. Melnick al., "The Effects of Market Structure and Bargaining Position on Hospital Prices," Journal of Health Economics 11, no. 3 (1992): 217-233; D. Dranove, D.M. Shanley, and W White, "Price and Concentration in Hospital Markets: The Switch from Patient-Driven to Payer-Driven Competition," Journal of Law and Economics 36, no. 1 (1993): 179-204; and J. Gruber, "The Effect of Price Shopping in Medical Markets: Hospital Responses to PPOs in California," NBER Working Paper no. 4190 (Cambridge: National Bureau of Economic Research, October 1992).
4. These studies include M. Noether, "Competition among Hospitals," Journal of Health Economics 7, no. 3 (1988): 259-284; M. Staten, J. Umbeck, and W. Dunkelberg, "Market Share/Market Power Revisited: A New Test for an Old Theory," Journal of Health Economics 7, no. 1 (1988): 73-87; G. Melnick al., "The Effects of Market Structure and Bargaining Position on Hospital Prices," Journal of Health Economics 11, no. 3 (1992): 217-233; D. Dranove, D.M. Shanley, and W White, "Price and Concentration in Hospital Markets: The Switch from Patient-Driven to Payer-Driven Competition," Journal of Law and Economics 36, no. 1 (1993): 179-204; and J. Gruber, "The Effect of Price Shopping in Medical Markets: Hospital Responses to PPOs in California," NBER Working Paper no. 4190 (Cambridge: National Bureau of Economic Research, October 1992).
5. These studies include M. Noether, "Competition among Hospitals," Journal of Health Economics 7, no. 3 (1988): 259-284; M. Staten, J. Umbeck, and W. Dunkelberg, "Market Share/Market Power Revisited: A New Test for an Old Theory," Journal of Health Economics 7, no. 1 (1988): 73-87; G. Melnick al., "The Effects of Market Structure and Bargaining Position on Hospital Prices," Journal of Health Economics 11, no. 3 (1992): 217-233; D. Dranove, D.M. Shanley, and W White, "Price and Concentration in Hospital Markets: The Switch from Patient-Driven to Payer-Driven Competition," Journal of Law and Economics 36, no. 1 (1993): 179-204; and J. Gruber, "The Effect of Price Shopping in Medical Markets: Hospital Responses to PPOs in California," NBER Working Paper no. 4190 (Cambridge: National Bureau of Economic Research, October 1992).
6. These studies include M. Noether, "Competition among Hospitals," Journal of Health Economics 7, no. 3 (1988): 259-284; M. Staten, J. Umbeck, and W. Dunkelberg, "Market Share/Market Power Revisited: A New Test for an Old Theory," Journal of Health Economics 7, no. 1 (1988): 73-87; G. Melnick al., "The Effects of Market Structure and Bargaining Position on Hospital Prices," Journal of Health Economics 11, no. 3 (1992): 217-233; D. Dranove, D.M. Shanley, and W White, "Price and Concentration in Hospital Markets: The Switch from Patient-Driven to Payer-Driven Competition," Journal of Law and Economics 36, no. 1 (1993): 179-204; and J. Gruber, "The Effect of Price Shopping in Medical Markets: Hospital Responses to PPOs in California," NBER Working Paper no. 4190 (Cambridge: National Bureau of Economic Research, October 1992).
7. These studies include M. Noether, "Competition among Hospitals," Journal of Health Economics 7, no. 3 (1988): 259-284; M. Staten, J. Umbeck, and W. Dunkelberg, "Market Share/Market Power Revisited: A New Test for an Old Theory," Journal of Health Economics 7, no. 1 (1988): 73-87; G. Melnick al., "The Effects of Market Structure and Bargaining Position on Hospital Prices," Journal of Health Economics 11, no. 3 (1992): 217-233; D. Dranove, D.M. Shanley, and W White, "Price and Concentration in Hospital Markets: The Switch from Patient-Driven to Payer-Driven Competition," Journal of Law and Economics 36, no. 1 (1993): 179-204; and J. Gruber, "The Effect of Price Shopping in Medical Markets: Hospital Responses to PPOs in California," NBER Working Paper no. 4190 (Cambridge: National Bureau of Economic Research, October 1992).
8. Staten et al., "Market Share/Market Power Revisited"; and Melnick et al., "The Effects of Market Structure," examine actual prices but do not examine market power resulting specifically from consolidation.
9. Staten et al., "Market Share/Market Power Revisited"; and Melnick et al., "The Effects of Market Structure," examine actual prices but do not examine market power resulting specifically from consolidation.
10. See Dranove et al., "Price and Concentration in Hospital Markets," for further discussion.
11. R. Connor et al., "The Effects of Market Concentration Horizontal Mergers on Hospital Costs and Prices," International Journal of the Economics of Business 5, no. 2 (1998): 159-180.
12. Mergers that generate only trivial increases in concentration generally fall under an antitrust "safe harbor." See U.S. Department of Justice and Federal Trade Commission, Horizontal Merger Guidelines (Washington: FTC, 8 April 1997). Also note that only a small percentage of FTC inquiries lead to court challenges.
13. Using logs is indicated by Box-Cox maximum likelihood tests and also permits direct comparisons of results across geographic areas.
14. The Hirschman-Herfindahl Index (HHI) usually describes the degree of competition in a market, so that all sellers are assigned the same value. The modification implemented in this paper measures the level of competition facing individual sellers in a market.
15. For example, see the discussion in Capps et al., "Antitrust Policy and Hospital Mergers."
16. See, for example, E. Keeler, G. Melnick, and J. Zwanziger, "The Changing Effects of Competition on Non-Profit and For-Profit Hospital Pricing Behavior," Journal of Health Economics 18, no. 1 (1999): 69-96.
17. For details of how we computed the HHI, as well as full regression results, see www.kellogg .northwestern.edu/faculty/dranove/htm/ CDHealthAffairs/CDHealthAffairs.html.
18. It is not exactly zero because if an independent hospital competes with consolidators, then the HHI increases for every hospital. That is, when a merger occurs in a market, all hospitals' HHIs will change, but for the nonmerging hospitals, the effect on Change in HHI will be slight.
19. It is possible that the decision to consolidate is correlated with unmeasured determinants of price. This could impart bias to the coefficient on Change in HHI. We suspect that the potential bias is small and in the conservative direction. If anything, we might expect hospitals with higher-than-expected prices to be less eager to merge (based on the "if it's not broken, don't fix it" view). If so, then the coefficient on Change in HHI is biased negative.
20. Our results for the one state for which we did not have complete data on patient utilization could be biased if missing hospitals were situated near included/nonconsolidated hospitals. This would hold down the latter's prices, which we would misattribute to their absence of market power. We examined the data and did not observe such a confounding problem.
21. We primarily resolved discrepancies using Lexis-Nexis, which enables full-text search of national and local newspapers as well as health care trade journals.
22. We estimated robust standard errors to account for multiple observations of each hospital. This generally inflates standard errors and reduces t-statistics. For complete regression results, see www.kellogg.northwestern.edu/ faculty/ dranove/htm/CDHealthAffairs/CDHealthAffairs .html.