How mergers have impacted healthcare costs

In a new study published in American Economic Review: Insights, researchers analyzed 1,164 mergers that took place between 2000 and 2020 among the country's 5,000 acute-care hospitals.

Overall, the researchers found that mergers increased prices by an average of 1.6% over two years. In deals that provided hospitals with significant market power under federal guidelines, prices increased by an average of 5.2%. These price increases also increased national health spending by $204 million on average in the year after a merger.

"Since 2000, hospital prices have grown faster than prices in any other sector of the economy," said Zack Cooper, an associate professor of economics and of health policy at Yale University and one of the study's authors. "The average price of an inpatient admission is now nearly $25,000."

Mergers in rural areas with lower incomes and higher poverty rates saw the largest average increases in prices, primarily for outpatient services. This larger price increase could be due to fewer outpatient surgery centers competing for patients' businesses, the researchers said.

The researchers also noted that the Federal Trade Commission (FTC) could have flagged 238 of the mergers, or 20%, as being likely to reduce competition or raise prices based on standard screening tools. However, only 13 mergers, or 1%, were ultimately challenged by FTC.

In a separate study published in Health Services Research, researchers found that cross-market mergers — which FTC has yet to challenge — also led to higher healthcare costs. The study analyzed commercial claims data from the Health Care Cost Institute from 2009 to 2017. In total, the study included 214 hospitals that acquired hospitals from more than 50 miles away and 955 control hospitals.

The researchers found that cross-market mergers increased healthcare prices by almost 13% over six years. Price increases were even higher when the acquired hospital had a larger market share than the acquiring hospital, growing by 21.8%. When the acquiring hospital had the larger market share, prices increased by 9.7%.

According to STAT+, these findings are similar to other existing studies on cross-market mergers. For example, a 2019 study found that prices increased by 31% if acquiring hospitals had a small market share and purchased hospitals a large one and by 18% if the opposite was true.

"The findings stand for themselves as yet another demonstration that these mergers really are causing price increases," said Katherine Gudiksen, executive editor of the Source on Healthcare Price and Competition at the University of California College of Law, San Francisco, and one of the study's authors.

Hospitals and regulators are at odds over mergers

For their part, hospitals claim that mergers create efficiencies and allow organizations to combine resources for more strategic investments and to improve quality. Research has also shown that operating costs drop by an average of 4% to 7% at acquired hospitals after a deal.

The American Hospital Association (AHA) has also pushed back on both studies, and called the study on cross-market mergers "seriously flawed." Aaron Wesolowski, AHA's VP of research strategy and policy communications, said that the Arnold Foundation, which funded the study, has a "long track record of backing anti-hospital hit jobs."

At the same time, regulatory scrutiny of healthcare transactions has increased, with FTC challenging recent acquisitions in California and North Carolina.

In addition, FTC and the Department of Justice (DOJ) last year finalized new merger guidelines that aim to limit certain types of consolidation. Under the guidelines, organizations would not be allowed to merge if doing so prevents a potential competitor from entering the market or reduces incentives to pay higher wages.

The guidelines also lower the necessary threshold for regulatory review to a minimum market index of 1,800 or an increase of at least 100 in a highly concentrated market on the Herfindahl-Hirschman Index. FTC and DOJ have also said they plan to study any mergers where a combined company holds at least a 30% market share — a concentration that many hospital mergers exceed.

"Clients are thinking earlier, longer and harder about antitrust risk, baking in a longer potential timeline, more scrutiny and risk in deals being cleared," said Alexis Gilman, a partner at Crowell & Moring who focuses on antitrust issues. "For deals that are in the new threshold of what is now called highly concentrated markets, those are the deals that are likely to cause a lot more second thoughts."

Advisory Board's M&A resources

For more insights on the impact of mergers and acquisitions (M&A) on healthcare, check out these Advisory Board resources:

Medical group consolidation is growing and reshaping the physician landscape. This cheat sheet explains why consolidation matters, what's driving the trend, and which specialties have been impacted the most. Separately, this expert insight outlines the four must-answer questions for industry consolidation.

For post-acute care organizations, this research explains the current state of post-acute M&A, including the acquisition patterns leaders can expect to see and market trends that could affect interest in future investments.

We also offer a market insights report on how regional health plans can grow through diversification, as well as an infographic on how health insurers are diversifying their revenue streams. (Taylor, Becker's Hospital CFO Report, 4/25; Evans, Wall Street Journal, 4/24; Bannow, STAT+ [subscription required], 4/23)