Hospital mergers result in higher prices

Classic economic theory is that reducing competition in an area that is not perfectly competitive will cause prices to rise over time. Hospital systems have contended that operating at a larger scale will allow them to achieve certain efficiencies, whether that be in purchasing power, or in shared overhead. Those benefits might exist, but larger hospital systems also have more negotiating power with payers. While hospital systems claim that they are merging for the benefit of patients, who actually benefits?

From a financial perspective, the New York Times published analysis supporting economic theory, showing that generally, prices in a region have risen after major healthcare mergers. In 19 of the 25 areas with the most hospital consolidation from 2010 to 2013, the prices of the merged hospital systems experienced the highest percentage change, compared to other hospitals in the same state. Of the remaining six, the hospital merger that saw a substantial price decline was a merger that was opposed by the Federal Trade Commission, where the involved parties reached a settlement (presumably involving some pricing restrictions). The other five cases saw no substantial changes in price changes, which is actually better than the state average, which did rise over the same time period.

It's not just hospitals that are merging -- physician groups are as well. As the provider groups get larger, they are able to negotiate higher rates. Perversely, when insurers refuse to compensate smaller providers at the same rates, they make mergers more attractive to provider groups who are then able to demand higher rates. Thus, a short-term focus on reducing costs can result in higher costs for the insurer in the long run.