Author information Copyright and License information Disclaimer
The final verdict on hospital networks is in. Despite the self-promoting ads in the media, hospital mergers increase costs and do not improve quality. The Federal Trade Commission’s (FTC) Director of the Bureau of Economics recently stated that when hospitals merge, they face less competition and charge as much as 40 to 50 percent higher prices than if they had not merged or consolidated. The FTC has been challenging hospital mergers in the courts for some time and, after a string of failures, has won three cases over the past two years. It has also won its first-ever litigated case challenging a health system’s acquisition of a physician group. 1 These court wins by the FTC has caused considerable anxiety among hospital executives contemplating mergers.
In 2012 the Robert Woods Johnson Foundation conducted an exhaustive review of studies on hospital consolidation. Their conclusions were:
ORDER WITH US AND GET FULL ASSIGNMENT HELP FOR THIS QUESTION AND ANY OTHER ASSIGNMENTS (PLAGIARISM FREE)
Hospital consolidation results in higher prices. This is true across geographic markets and different data sources. When hospitals merge in already concentrated markets, the price increases can be dramatic.
Physician-hospital consolidation has yet to lead to either improved quality or reduced costs. Studies find that consolidation was primarily for enhanced bargaining power with payers and did not lead to true integration. Consolidation without integration does not lead to enhanced performance.
Hospital competition improves the quality of care. This is true under administered price systems, such as Medicare and the English National Health Service, and market-determined pricing, such as the private health insurance market. The evidence is more mixed from studies of market-determined systems, however. 2
A recent study reported in JAMA of 4.5 million HMO patients concluded that “Organizations in California that are owned by local hospitals or multihospital systems incur significantly higher expenditures per patient than integrated medical groups and IPAs owned by participating physicians.”
America’s Health Insurance Plans (AHIP), the lobbying and trade group for health insurers, has proclaimed, “Consolidation promises greater efficiency, but all that ever materializes is greater costs.”
One economist noted that there had been over one thousand healthcare mergers and acquisitions since 1994. He noted that they “muffled competition and caused higher prices.” He also called Accountable Care Organizations (ACOs) an “anticompetitive sham” dominated by hospitals implying that these organizations will further exacerbate healthcare costs. 5
One might ask what took policymakers, scholars, and researchers so long to figure out that hospital mergers would increase, not lower, costs. The warning signs were present from the very onset of merger mania.
When the former Jewish Hospital of St. Louis merged with Barnes Hospital in 1996, members of the Board of Directors told the medical staff (including myself) that the merger would “improve efficiency through economies of scale.” Shortly after the merger, it was clear to any interested observer that the opposite was happening. Barnes Jewish quickly developed a costly administrative bureaucracy, tore down perfectly good buildings replacing them with new, often unnecessary lavish structures, spent enormous sums on marketing, and purchased physician practices at above market value on which they lost money.
Almost two decades after the board told the medical staff about the merger, Barnes Jewish Hospital has become BJC Health Care. It owns 12 hospitals, 26,000 employees, 3,378 physicians, and a net revenue of approximately $4 billion. BJC is not unique. It is just one of many similar hospital mergers throughout the U.S.6.
After the Barnes Jewish merger, I wrote several articles contending that the basic reason that hospitals were merging was not to improve efficiency and lower costs but to form monopolies and increase prices. I also wrote about how the Federal Trade Commission played a pivotal role in orchestrating this system that allowed hospital monopolies to flourish. These articles were compiled into two books. 7
Since the FTC has successfully prevented mergers in only three hospitals, what can be done with all of the already merged hospitals? Or, as one pundit put it, “What can be done now that the horse has already left the barn?” The answer is probably very little. Hospitals are among the most powerful lobbying groups in the country.
It is quite understandable for physicians to feel little sympathy for the FTC in its fight against hospital mergers. Its actions are too little and too late. Furthermore, the FTC has a track record that has been fundamentally hostile to physicians. The FTC successfully sued the American Medical Association in an administrative law court where it acted as prosecutor, judge, and jury and removed one of the AMA’s Principles of Medical Ethics to impose its version of “free market competition” on the medical profession. At that time, many said that the FTC “was out to get the doctors.” 8
The FTC’s subsequent actions confirmed this short evaluation of the FTC. The FTC vehemently opposed legislation introduced in Congress and backed by the AMA that would have allowed doctors to bargain collectively. The FTC’s position on doctors was clear. The FTC stated, “Physician collective bargaining leads to higher prices and is unlikely to likely to result in higher quality care.” 9
Finally, when clinically integrated physician-owned groups tried to bargain with health insurance companies as hospital-integrated systems do, the FTC signed more than 30 consent agreements involving price fixing by groups of physicians, which in its opinion, were not properly integrated or engaged in substantial risk sharing. It needs to be clarified what risk sharing is, and the AMA tried unsuccessfully to get the risk sharing requirement removed. 10
When a new drug or procedure is introduced into medicine, studies are done to determine its effectiveness. Lamentably, the FTC doesn’t operate in this fashion. The FTC has based its policies on its own arbitrary, rigid, self-made and often biased rules, which carry the force of law. The FTC never conducted studies to determine whether clinically integrated physician groups might be more cost-effective than hospital-integrated systems. A study in JAMA of 4.5 million patients showed that hospital-owned organizations have significantly higher costs than physician-owned integrated systems or IPAs, which fundamentally undermines the FTC position on physician-run organizations. 3 The FTC should have undertaken similar studies years ago.
Competition has been the guiding principle in health system reform over the past three decades. The theory was that healthcare costs would decrease and quality would improve through competition. This theory hasn’t been proved or disproved because it hasn’t been tried. From the beginning of health system reform, hospitals have done everything in their power to form mergers, create monopolies and avoid competition.
The United States is under tremendous pressure to reduce healthcare costs. Now that the truth about hospital mergers as a major driver of healthcare costs has been exposed, we’ll have to wait and see if anything is done to correct the problem. It is doubtful that antitrust lawsuits by the FTC alone will have much impact.
There are five commonly referred to types of business combinations known as mergers: conglomerate merger, horizontal merger, market extension merger, vertical merger and product extension merger. The term chosen to describe the merger depends on the economic function, the purpose of the business transaction and the relationship between the merging companies.
A merger between firms that are involved in totally unrelated business activities. There are two types of conglomerate mergers: pure and mixed. Pure conglomerate mergers involve firms with nothing in common, while mixed conglomerate mergers involve firms looking for product extensions or market extensions.
A leading manufacturer of athletic shoes merges with a soft drink firm. The resulting company faces the same competition in its two markets after the merger as the individual firms did. One example of a conglomerate merger was the merger between the Walt Disney Company and the American Broadcasting Company.
Benefits of a Merger or Acquisition
A merger occurs between companies in the same industry. A horizontal merger is a business consolidation that occurs between firms that operate in the same space, often as competitors offering the same good or service. Horizontal mergers are common in industries with fewer firms, as competition tends to be higher. The synergies and potential gains in market share are much greater for merging firms in such an industry.
For example, a merger between Coca-Cola and the Pepsi beverage division would be horizontal. The goal of a horizontal merger is to create a new, larger organization with more market share. Because the merging companies’ business operations may be very similar, there may be opportunities to join certain operations, such as manufacturing, and reduce costs.
Market Extension Mergers
A market extension merger occurs between companies that deal in the same products but in different markets. The main purpose of the market extension merger is to ensure that the merging companies can access a bigger market, and that ensures a bigger client base.
A good example of a market extension merger is the acquisition of Eagle Bancshares Inc by RBC Centura. Eagle Bancshares is headquartered in Atlanta, Georgia and has 283 workers. It has almost 90,000 accounts and looks after assets worth US $1.1 billion.
Eagle Bancshares also holds the Tucker Federal Bank, one of the ten biggest banks in the metropolitan Atlanta region, as far as deposit market share is concerned. One of this acquisition’s major benefits is that it enables RBC to advance its growing operations in the North American market.
With the help of this acquisition, RBC has got a chance to deal in the financial market of Atlanta, which is among the leading upcoming financial markets in the USA. This move would allow RBC to diversify its base of operations.
Product Extension Mergers
A product extension merger occurs between two business organizations that deal in products related to each other and operate in the same market. The product extension merger allows the merging companies to group their products and get access to a bigger set of consumers. This ensures that they earn higher profits.
Broadcom’s acquisition of Mobilink Telecom Inc. is a good example of a product extension merger. Broadcom manufactures Bluetooth personal area network hardware systems and chips for IEEE 802.11b wireless LAN.
Mobilink Telecom Inc. deals in the manufacturing of product designs meant for handsets that are equipped with the Global System for Mobile Communications technology. It is also in the process of being certified to produce wireless networking chips that have high speed and General Packet Radio Service technology. It is expected that the products of Mobilink Telecom Inc. would complement the wireless products of Broadcom.
A merger between companies producing different goods or services for one specific finished product. A vertical merger occurs when two or more firms operating at different levels within an industry’s supply chain merge operations. Most often, the logic behind the merger is to increase synergies created by merging firms that would be more efficient operating as one.
A vertical merger joins companies that may not compete with each other but exist in the same supply chain. An automobile company joining a parts supplier would be an example of a vertical merger. Such a deal would allow the automobile division to obtain better pricing on parts and have better control over the manufacturing process. In turn, the parts division would guarantee a steady stream of business.
Synergy, the idea that the value and performance of two companies combined will be greater than the sum of the separate individual parts, is one of the reasons companies merge.