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Hospital Mergers

Who Really Pays?


With healthcare a major issue facing the presidential candidates, researchers at Carnegie Mellon University are providing insights into the impact of its consolidation.

Antitrust officials in the U.S. have had the healthcare industry on their radar since hospitals began consolidating at a staggering rate in the mid-1990s. It was estimated that there were over 900 hospital mergers from 1994-2000 alone. Today, large cities such as Boston, Pittsburgh, and San Francisco are now dominated by two or three healthcare systems. This concerns antitrust officials because competition keeps markets healthy for consumers.

The greater the competition, the greater the need for companies to cater to consumers by offering new products and services that are competitively priced. Lack of competition, on the other hand, not only allows companies to raise prices without fear of losing customer share but also allows them to take their time in introducing new products and services to market.

In their research, Carnegie Mellon economics professor Martin Gaynor of the Heinz School and former Heinz School professor William Vogt, now a Senior Economist with the RAND Corporation, went beyond the long-held beliefs about value of competition in their research. Using hospital industry data from California, they simulated a for-profit merger and a not-for-profit merger to determine the effects each would have on overall costs.

In both instances, costs rose substantially. In fact, post-merger prices increased by as much as 53%, with little difference between for-profit and not-for-profit hospitals.

So who gets stuck paying the bill? Ultimately, says Gaynor, consumers. In response to the increases, insurance companies raise their rates, which causes companies to require employees to kick in more for their health plans, or accept lower pay.

What makes Gaynor's and Vogt's work of such interest to federal officials is that it helps build the U.S. government's case against the consolidation of not-for-profit hospitals, which account for 60% of the industry. Not-for-profits have successfully argued that they would have no reason to exploit a competition-free market. After all, they are organized to help the community, not make money, so benefiting from a weakened market would contradict their missions.

"A major next step for research in this area is sorting out the factors that determine whether competition will lead to increased or decreased quality," Gaynor wrote in a paper titled What Do We Know about Competition and Quality in Health Care Markets?

In 2003, Gaynor testified at the Federal Trade Commission/Department of Justice joint hearings on "Countervailing Power in Health Care." He has also served as an advisor to the Netherlands government on healthcare competition and is currently working in a similar role with the United Kingdom, which recently adopted a new hospital payment system.

Although he admits it's a daunting task, Gaynor believes that economic research can provide a helpful framework for quantifying a subject as complex as healthcare quality, which will further help lawmakers enact a robust healthcare policy — and keep more cash in consumers' pockets.

Related Links: Heinz School  |  Research at Carnegie Mellon

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