Diversion Analysis as Applied to Hospital Mergers: A Primer

Fri Jul 11 16:24:38 EDT 2014
By Dr. Subramaniam (Subbu) Ramanarayanan

Driven by a variety of factors, merger activity among hospitals has been robust over the last couple of years. In fact, the annual number of transactions is nearly double what it was five years ago. With continued debate over the benefits of hospital consolidation and whether these benefits outweigh a possible harm to competition, hospital mergers have come under renewed scrutiny from the Federal Trade Commission (FTC) and, on occasion, the Department of Justice’s (DOJ’s) Antitrust Division.

Coincident with this increased scrutiny has been a change in the tools used by these agencies in the analysis of hospital mergers. Many credit these new tools - such as hospital merger simulation, the Willingness-to-Pay (WTP) framework, and diversion analysis - with explaining the recent string of successes the FTC has had in litigating hospital merger cases. With the use of these new tools, the analysis of hospital competition has moved away from patient flow-based methods towards more structural models that aim to better capture the underlying dynamics of the industry and come up with a prediction for the impact of the transaction prices.

In “Diversion Analysis as Applied to Hospital Mergers: A Primer,” Dr. Subramaniam (Subbu) Ramanarayanan examines some of the benefits and tradeoffs inherent to using diversion analysis as a screen in hospital merger reviews.