Testing the latest empirical approach to hospital mergers and market power evaluation
- Presenter:
Chair: Gabriel Picone; Discussant: Gabriel Picone Tue June 6, 2006 10:45-12:15 Room 332
Mergers of hospitals in the same locality raise interest because they restrict the choices that patients have when hospital care is consumed, and they give hospitals market power in contracting with the local insurers and managed care organizations. For at least the past twenty years, little progress has been made in quantifying the market structure and market power of hospitals for lack of convincing methodology. The inability to demonstrate the exercise of market power in local hospital markets has significant policy implications: over the past 12 years or more, the federal government has lost every major antitrust case involving mergers of local hospitals, often for lack of a convincing market delineation method. In effect, existing techniques assume patients have full insurance and have the mobility and savings to search out the better hospitals outside the general vicinity of their residential location, while in truth the ‘silent majority’ of patients have incomplete insurance arrangements from managed care organizations that restrict their choice set. This paper uses Florida hospital discharge and financial data and a new econometric approach (Capps et al. 2003) to study hospital market power and to show how it affects pricing and the efficiency of hospital care. The econometric model is flexible enough to detect groups of patients who must rely on local hospitals. The Capps et al. study demonstrated, with some success, its application on San Diego, Ca. data. But at this early stage the reliability of the empirical methodology remains unverified and needs to be subjected to further scrutiny. The current paper will examine several questions about the implementation of these methods on hospital mergers in Florida in the 1990s. Is this a truly feasible method that can be readily applied to many other situations in the market? Does the model produce stable and reliable estimates of the effects, particularly given the acute demands of merger litigation? How does it change our thinking about the extent of the problem of hospital market power in local markets and its impact on consumers?
