This Issue Brief examines
the academic literature and issues in consolidation of the
hospital sector in the context of responses to changes in the
competitive environment. It analyzes the motivations for
consolidation as well as its effects.
Hospital merger activity has
increased dramatically in recent years. The current wave of
mergers is primarily a reaction to a competitive environment that
is placing a greater emphasis on controlling costs and forcing
high-cost providers out of the market. The growth of managed care
has placed considerable pressure on providers of health care and,
in particular, on hospitals.
The evolution of insurance
companies' behavior helps explain the recent hospital
consolidation movement. As managed care has become the dominant
type of coverage in the last decade, insurance companies have
become more active in trying to control costs—a reversion to
their previous practices before the advent of managed care.
Insurance companies have placed cost constraints on providers,
both in the early years of health insurance and currently, when
there are strong competitive forces.
Hospitals claim that their
primary merger motives are improving efficiency and the quality
of care. The empirical evidence on this claim is mixed.
Vertical integration (between
suppliers and buyers of health care services, such as between
hospitals and physicians) has appealed to hospitals because of
their need to obtain more patients. More research is needed to
explore the effects of vertical integration in the health care
sector.
In one of the more significant
recent legal rulings, the U.S. Justice Department lost a 1997
case challenging the merger of two hospitals in the New York City
metropolitan area. This, along with other recent losses by the
antitrust authorities, does not bode well for the government's
ability to prevent hospital mergers in metropolitan areas. It is
difficult to generalize on an appropriate antitrust policy for
hospital mergers.
Hospital consolidation is likely
to continue at a rapid pace. Since some developments may reduce
the cost of employee benefits while others may increase the cost
of these benefits, the final effect on the provision of health
care benefits by employers is uncertain.
Employers must pay close attention to the hospital
consolidation movement because it will lead to important changes
in the provision of health care benefits.
