Another example of market failure

KFF Health News reported on an agreement that was made five years ago: competing hospitals could join together as one entity, provided that the new health system would not raise prices excessively, would provide a certain amount of charity care, and would maintain or achieve certain quality standards. Unfortunately, the new health system appears to not be upholding many of its obligations.

It is understandable why competitors might want to join together and secure greater market power -- without competition, the new entity can dictate higher prices and not worry about being undercut. This trend occurred to such an extent (along with its ill effects on consumers) that the US federal government passed anti-trust legislation near the start of the twentieth century to stop companies from engaging in such behavior. Within the healthcare industry, state legislatures can pass a certain type of law to allow these mergers (essentially recognizing public need for a more efficient or more stable network), and one can imagine organizations influencing legislators through lobbying or perhaps less legal means.

Approving of these mergers seems to run counter to economic theory and the emphasis that it places on competition. When an organization becomes the only network to provide hospital care in a region, it also seems likely that they become too entrenched for the oversight agencies to allow them to fail. In that regard, it is unclear how states can remedy situations in which the merger is complete (and difficult to undo), but the new entity is not behaving as promised.