Research Brief

Do Hospital Mergers Really Cut Health Care Costs?

Matt Schmitt finds that size and location help determine how much, if any, costs fall after deals

More than 2,500 U.S. hospitals were involved in mergers or takeovers between 2000 and 2015, and ongoing consolidation is expected to keep antitrust regulators busy for years. To gain regulatory permission for these deals, almost all buyers claim that their plans lead to lower hospital operating costs. The Federal Trade Commission, charged with preserving competitive pricing, generally views these claims favorably when adequately substantiated; all else equal, lower costs should translate into lower prices for insurers and patients.

But evidence of systematically lower costs among merged hospitals has been tough to find. Despite the pace of takeovers, hospital costs have never been higher. They have risen along with the nation’s overall health care bill, which in 2014 was more than 10 times the total in 1980, according to the Centers for Medicare and Medicaid Services. Historically, academic research has been unable to prove that mergers systematically make providing hospital services less expensive. And many of the studies have become outdated in the wake of advances in technology, the enormous growth of hospital chains and other industry changes that make today’s hospital mergers unlike those of the past.

UCLA Anderson’s Matt Schmitt steps into this debate with a modern approach to the research. In a study recently published in the Journal of Health Economics, Schmitt illustrates how today’s more common multi-hospital system mergers have different consequences for hospital costs than traditional mergers between independent hospitals. The research also demonstrates that geographic overlap, where the merging hospitals share a market, leads to little if any cost savings.

Opt In to the Review Monthly Email Update.

Schmitt starts with a comparison of four-year cost trends at hospitals that did and didn’t merge between 2000 and 2010, years in which the size of acquirers ballooned with the popularity of multi-hospital corporations. During that period, hospitals that would remain unacquired, a control group, had similar cost trends as those that would later participate in mergers.

Then, on average, acquired hospitals realized cost savings of 4 percent to 7 percent in the years following an acquisition, according to Schmitt’s core findings. The additional savings at target hospitals were likely not a result of changes in services offered or the mix of patients following the merger.

Bigger acquirers were able to wring bigger savings out of purchased hospitals, the study states. The biggest acquirers, chains of 51 or more hospitals, lowered costs at their target hospitals about 7.5 percent in years following the mergers. Costs at hospital systems with fewer than 10 facilities saw 3.4 percent cost reductions. And independent hospitals saw little or no difference in costs at their newly acquired facilities.

Big acquirers are not necessarily better than independents at lowering costs, Schmitt explains in the study. Rather, he notes, differences in the rationales for making acquisitions may drive the savings discrepancies.

Independent buyers were much more likely than health care systems to buy hospitals that were direct competitors, perhaps to increase local market share. Alternatively, about three-quarters of the hospitals purchased by multi-hospital systems were in markets outside of any county where the system already operated. Perhaps more obvious cost-cutting possibilities made these properties attractive, Schmitt suggests.

To illustrate this effect, Schmitt compares cost savings for in-market versus out-of-market acquisitions. Out-of-market acquisitions, regardless of the size of the buyers, consistently resulted in post-merger cost savings. In-market acquisitions rarely achieved cost savings, the study finds.

Featured Faculty

About the Research

Schmitt, M. (2017). Do hospital mergers reduce costs? Journal of Health Economics.

Related Articles

A photo of a merge sign Research Brief / Mergers and Acquisitions

Unvarnished Merger Talk: Will This Deal Help Us Raise Prices?

Customer loyalty, barriers to entry and other factors at play

A senior woman walking down a corridor with the assistance of a walker. view from rear. Research Brief / Health Care

A Nudge to Reduce the Government Tab for Nursing Home Care

An upfront fee for taking Medicaid patients could shorten stays

Hospital building Research Brief / Mergers and Acquisitions

How Antitrust Thinking on Hospital Mergers Has Been Forced to Evolve

Matt Schmitt’s research shows hospital prices rise after acquisitions, even where local competition is unchanged

Illustration of a man thinking Feature / Time Management

Time Management for Startups: Entrepreneurs Act as if Future Hours Aren’t Worth Much

Research adapts big-company operational knowledge to smaller organizations