EVENTS

Date:	Friday, November 21, 2008
Time:	9:30 AM -- 2:30 PM
Location:	Wohlstetter Conference Center, Twelfth Floor, AEI 1150 Seventeenth Street, N.W., Washington, D.C. 20036

When Hospitals Merge: Prospects for Patients, Health Costs, and Health Outcomes

WASHINGTON, NOVEMBER 25, 2008--Nonprofit organizations displaying anticompetitive behavior is not, as one might think, a contradiction in terms. Matthew Reilly, head of the mergers section at the Federal Trade Commission (FTC), which assesses the competitiveness of hospital mergers, spoke at an AEI conference on hospital competition on November 21. "Non-profit hospitals can and do exercise market power," Reilly said.

A recent example can be found in the Evanston Northwestern-Highland Park Hospital merger. David Hyman of the University of Illinois pointed out that consultants advised Evanston Northwestern that merging with Highland Park Hospital would allow the former to "negotiate contracts with payers from a stronger position." Price hikes after the merger were evaluated by the FTC retrospectively, a case was brought, and the courts determined that in spite of the quality investments Evanston Northwestern had made in Highland Park Hospital, the merger was still anticompetitive. Behavior of this nature carries important implications for the insured public, because health plans contracting with hospitals pass on cost increases to consumers.

This does not mean that hospital mergers are inherently bad, nor does it mean that all hospital mergers are anticompetitive. Reilly asserted that the vast majority of hospital mergers do not result in anticompetitive behavior. Often, hospital acquisitions involve an acquiring hospital with capital or superior quality and expertise attempting to save a potential target hospital from financial collapse or intending to infuse capital in order to significantly improve the target hospital's operations. Reilly added that the FTC and federal courts are sympathetic to mergers that might keep a hospital from closing its doors or that offers the promise of significant quality and efficiency improvements or expanded services to a target hospital. Weighing potential benefits against potential harms remains at the heart of hospital merger evaluations at the FTC, he concluded.

Effective cost-benefit analysis is important in analyzing hospital mergers, but it may be inadequate at present. Reilly, Hyman, Ted Frech of the University of California, Santa Barbara, Robert Town of the University of Minnesota, and Monica Noether of CRA International all highlighted problems with properly defining the market in which a given hospital operates, as well as problems with demonstrating the market power a merger could potentially create. Frech offered examples of flawed analysis used in antitrust enforcement: for example, an agency may be misled when the decision made by patients to seek care at facilities other than the local hospital has little to do with price considerations. Town proposed using a new model for such analysis based upon a health plan's "willingness to pay" to keep a hospital or hospital system in its network, arguing that this approach would be a better indicator of how a merger is likely to affect pricing.

One panel was devoted to the rise of short-stay specialty hospitals, such as cardiac or orthopedic hospitals. Jeff Stensland of MedPAC and John Schneider of the Health Economics Consulting Group discussed concerns that the presence of such hospitals would lead to an increase in outpatient procedures because such procedures could be done with increasing frequency rather than because excess procedures were warranted, a phenomenon sometimes referred to as supply-induced demand. Schneider pointed out, however, that while, in theory, specialty hospitals might create demand, supporting evidence for this claim is not strong. Kathleen Carey of Boston University suggested that specialty hospitals can improve physician productivity by providing doctors with fewer disruptions to an operating room schedule, improving quality through repetition of procedures, and generating higher patient satisfaction. General hospitals are concerned about losing high-profit-margin services they depend on to subsidize other areas of their operations, but Schneider pointed out that this concern would be best addressed by fixing the reimbursement policies that create the need to cross-subsidize care in the first place.

--WALTON DUMAS

For video, audio, and more information about this event, visit www.aei.org/event1837/.

For media inquiries, contact Veronique Rodman at 202.862.4870 or vrodman@aei.org.

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