Hospital Systems and Bargaining Power: Evidence from Out-Of-Market Acquisitions
and competition. Traditional studies (e.g., Lynk, 1995; Dranove and Ludwick, 1999; Keeler et al., 1999) analyzed the
relationship between prices and various measures of market concentration. More recently, researchers (Town and Vistnes,
2001; Capps, Dranove and Satterthwaite, 2003) and antitrust authorities (Farrell, Balan, Brand andWendling, 2011) have
begun using structural models that incorporate bargaining between hospitals and MCOs. These analyses identify the
market power of each hospital as a function of MCO enrollees’ (estimated) willigness-to-pay for the option to visit that
hospital instead of their next best alternative.
Though the more traditional concentration-based approach and the structural bargaining-based approach are quite
different, almost all of these studies share two important limitations. First, nearly all rely completely or very heavily on
cross-sectional variation to estimate a relationship between market structure and prices, making it difficult to identify a
true causal effect. In other words, very few take advantage of actual mergers when examining their competitive impact.
Second, they all restrict their examination of the effects of system acquisitions and mergers to the local market, despite
the fact that large regional and national hospital systems are becoming more common. Although it is often appropriate
for competition analyses to restrict attention to the relevant consumer market, that may not be the case for hospital care
as reimbursement rates are negotiated between hospitals and MCOs and multi-market hospital systems often play an
important role in the negotiations of their member hospitals. Studies focusing only on local market structure ignore the
potential price effects that may result if there is an interdependence between the outcome of negotiations in one patient
market and the profits earned in another (e.g., the bargaining power of member hospitals is influenced by their system
affiliation).
In this study we directly investigate the cross-market effects that system membership may have on the negotiated
reimbursement rates of their member hospitals. Rather than attempting to specify and test a particular model of this
cross-market system effect we utilize a difference-in-differences approach to examine the impact of actual system acquisitions
and isolate the cross-market effect by focusing on out-of-market mergers that had no impact on the local market
structure. Based on 95 such hospital acquisitions occurring across the United States during the years 2000-2008, we
find that hospitals exhibit significant increases of about 10 to 20 percent in their net reimbursement rates after joining
an out-of-market hospital system when compared with others that remained as independent stand-alone hospitals. We
confirm that our results are not driven by systematic differences between acquired hospitals and their peers, and we
show that the identified increases in reimbursement rates do not appear to be a result of changes in patient case-mix,
hospital quality, or the cost of providing care generally. The findings reveal that systems can have a significant impact
on the market power of hospitals in ways that have not been studied or taken into consideration in recent antitrust analysis.