Overcoming Market Power Sensitivities in Hospital Mergers: Part 2

By John Marren and Tom Babbo. Edited by Mary Grace Babbo. 

In part 1 of our series on hospital mergers, we discussed the rising trend of health system mergers, and the potential problems they create. Now, we will enumerate some of the challenges that mergers that create market concentration face, and provide further detail on our proposed solutions. 

Obstacles to Hospital Mergers 

• Company culture and management: If the CEO and the boards of two hospitals preparing to merge clash, disagreeing over issues such as perceived loss of status, differing organizational structures, and ineffective management practices, it can lead to internal strife that causes the merger to fail. 
• Antitrust laws: Hospital mergers are prohibited by the FTC if the proposed merger takes up too much market power, in order to “prevent anticompetitive conduct that would deprive consumers of the benefits of competition.” The FTC has increased antitrust enforcement in response to the recent influx of hospital mergers, so some potential hospital mergers now search outside of their geographic area and conduct smaller deals. 
• Payer dissatisfaction: Some critics believe the recent consolidation of large hospitals could lead to higher cost of care and limited patient choice. Insurers consolidating their network could cause the price of all hospital services to go up. 
• Diseconomies of scale: When two hospitals merge, they claim they will lower costs through an increase in efficiency. Yet, if two hospitals are already very large, sometimes mergers do not lead to gain from more efficiencies. 
• Religious affiliation clashes: Hospitals with a religious affiliation often must adhere to particular ethical guidelines concerning patient care. Catholic hospitals, for instance, are required to follow the Ethical and Religious Directives (EDRs) set by the USCCB. Sometimes secular hospitals cannot merge with a religious hospital, because they either don’t want to adopt the ethical guidelines, or their boards prohibit it. Similarly, some religious hospitals may be reluctant to merge with secular hospitals that do not or cannot comply with their ethical guidelines. 

Clinical Integration (CI): A Solution

• Company culture and management: CI allows for hospital affiliations that don’t force the institutions to commit to another’s governance and management structure, which limits potential clashes in leadership and company culture between hospitals.
• Antitrust laws:  CI provides a potentially more flexible framework for hospital collaborations, by applying existing antitrust enforcement policy. 
• Payer satisfaction: Unlike a hospital merger, CI does not result in a single entity, and has different degrees of exclusivity. Further, CI explicitly aims to reduce cost and improve quality of care. Because of these traits, clinically integrated systems do not raise the same potential objections from payers that hospital mergers might.
• Aligned payment incentives: Clinically integrated systems act as a transitioning tool from fee-for-service (FFS) health care systems to “fee-for-value,” and prepare hospitals to assume more financial risk. 
• Religious affiliation: Hospitals otherwise unable to pursue a merger on religious or ethical grounds can still collaborate on hospital service line integration activities, including joint contracting.