Efficiencies Analysis in Hospital Mergers

01 December 1999
By Dr. Thomas McCarthy and Dr. Lawrence Wu with Dr. Scott Thomas

A common rationale for hospital mergers is the cost savings that would be made possible through consolidation. These increased efficiencies are usually one of several critical factors in the decision to merge, but this otherwise obvious business rationale often gets lost in an antitrust investigation. A "disconnect" seems to develop between what everyone can accept as a good business justification -- lowering hospital costs -- and what the antitrust agencies are willing to "count" as a true efficiency that might help justify why a merger should be allowed. This "disconnect" seems to arise when it matters most; that is, when there is some concern that the merger might lead to higher prices.

In this paper, the authors examine how efficiencies are evaluated in an antitrust review of a hospital merger. One conclusion is that the source of the "disconnect" is the concern of the agencies and the courts over which cost savings will be "passed on" to consumers in the form of lower (or at least, not higher) prices. A second, but related, message is that many of the cost savings that are important to hospital management as a business rationale for the merger will not count with the agencies, especially when the merger is judged to threaten competition. A third conclusion is that, in most cases, the efficiencies defense is generally irrelevant. Adequate competition in the post-merger world is a sufficient defense on its own. For most hospital mergers, this is often a complete answer. Fourth, even though the efficiencies will very rarely be dispositive, they should be carefully tallied and forcefully asserted.

This article was published in Antitrust and Healthcare Insights into Analysis and Enforcement, American Bar Association, 1999, pp. 119-149. (A similar version appeared in the Antitrust Health Care Chronicle, Vol. 13, No. 1, Winter 1999, pp. 2-11.)