New Study Suggests Hospital Mergers Fail to Boost Profitability, Patient Outcomes

U.S. hospitals are experiencing a wave of mergers, but more needs to be known about how these mergers change hospital behavior, performance, and outcomes, especially to benefit patients. In a new study, researchers examined a merger between two large for-profit hospital chains. One would expect that a merger initiated by a large, successful, for-profit hospital system would succeed, but that was not the case. The study found that the merger achieved some of the acquirer’s aims, but the changes failed to drive detectable gains in profitability or patient outcomes.

The study was conducted by researchers at Carnegie Mellon University (CMU), Columbia University, Harvard University, and the University of Chicago. It appears as a National Bureau of Economic Research working paper.

“In our research to examine practices in hospitals involved in mergers, we spotlight the importance of hospital management and internal processes for both research and policy in health care and the economy at large,” explains Martin Gaynor, professor of economics and public policy at CMU’s Heinz College, who led the study.

Hospital consolidation through mergers and acquisitions has been a ubiquitous feature of the U.S. health care sector for more than two decades, with nearly 1,600 hospital mergers from 1998 to 2017. To learn more about the inner workings of such mergers, in this study, researchers focused on the merger in 2007 of two of the largest for-profit chains in the country, comprising more than 100 individual hospitals.

The study used data on inputs and outcomes that are tracked in existing administrative and survey data and data from the American Hospital Association; these were supplemented with management surveys to provide a window into firms’ organizational structure. For most measures, the study assessed changes at target and acquirer hospitals from before to after the merger relative to a comparison group of for-profit hospitals.

The study found that the acquirer exerted some influence on intermediate inputs in the production process at target hospitals, harmonizing information technology systems and sending personnel to manage the acquired facilities. After the merger, managerial processes were similar across hospitals in the chain, but these changes failed to drive detectable gains in profitability or patient outcomes (e.g., patient survival and readmission rates), even seven years after the merger.

Specifically, the profitability of the acquired hospitals did not rise detectably. Prices rose, but so did costs, with little detectable impact on quality of care. Patients’ clinical outcomes, particularly survival rates, hardly changed. The only clear difference in major outcomes tied to the merger was in the profitability of the acquiring firm’s existing hospitals, and this occurred in a negative direction: Compared to other for-profit hospitals, the acquiring firm’s profit rates fell three percentage points after the merger.

“Our findings offer a new perspective for antitrust authorities evaluating the claimed efficiencies of mergers,” suggests Shruthi Venkatesh, a PhD student in public policy at CMU’s Heinz College, who coauthored the study. “By taking an organizational view that considers stated aims of the merger, how the firm intends to implement those aims internally, and whether the changes are likely to yield improvements in performance, authorities could evaluate merging parties’ claims of efficiency and assess whether they will be realized.”

The research was funded in part by the National Institute on Aging.

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Summarized from an NBER Working Paper, The Anatomy of a Hospital System Merger: The Patient Did Not Respond Well to Treatment by Gaynor, M (Carnegie Mellon University), Sacarny, A (Columbia University), Sadun, R (Harvard University), Syverson, C (University of Chicago), and Venkatesh, S (Carnegie Mellon University).Copyright 2021 by The Authors. All rights reserved. 

About Heinz College of Information Systems and Public Policy
The Heinz College of Information Systems and Public Policy is home to two internationally recognized graduate-level institutions at Carnegie Mellon University: the School of Information Systems and Management and the School of Public Policy and Management. This unique colocation combined with its expertise in analytics set Heinz College apart in the areas of cybersecurity, health care, the future of work, smart cities, and arts & entertainment. In 2016, INFORMS named Heinz College the #1 academic program for Analytics Education. For more information, please visit www.heinz.cmu.edu.