EBRI Issue Brief

Health Care Consolidation and the Changing Health Care Marketplace: A Review of the Literature and Issues

Oct 1, 1999 16  pages


  • 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.