Is Antitrust Enforcement in the US Hospital Sector Too Lax to Prevent Anticompetitive Mergers?

This study investigates whether antitrust enforcement in the US hospital sector is too lenient to prevent anticompetitive mergers. Analyzing data from over 1,000 hospital mergers between 2002 and 2020, including detailed pricing and market concentration metrics from insurance claims data, the researchers estimate post-merger price increases and competition effects. Findings reveal that 20% of mergers could have been predicted to meaningfully lessen competition, with flagged mergers leading to average price increases of 5% and raising health spending by $204 million annually. The research underscores significant underenforcement, with only 1% of mergers challenged by the FTC during the studied period.

Full Citation and Link to Article

Brot, Zarek, Zack Cooper, Stuart V. Craig, and Lev Klarnet. "Is There Too Little Antitrust Enforcement in the US Hospital Sector?" AER: Insights 2024, 6(4): 526–542. https://doi.org/10.1257/aeri.20230340.

You can access the article directly through this DOI link.

Extended Summary

Central Research Question

This study examines whether antitrust enforcement in the US hospital sector has been too lenient, allowing hospital mergers to significantly lessen competition and raise healthcare prices. The central question focuses on whether federal antitrust actions, primarily conducted by the Federal Trade Commission (FTC), have adequately prevented anticompetitive behavior in an industry crucial to the economy and public health.

Previous Literature

Existing research has long raised concerns about rising market concentration across industries in the US, with hospitals being a particularly critical sector due to their role in public welfare. Studies, including those by Kwoka (2013) and Baer et al. (2020), highlight underenforcement of antitrust laws, with enforcement actions targeting only 2–3% of mergers. In the healthcare sector, prior work has shown that hospital consolidation often leads to higher prices without commensurate improvements in quality (Dafny, 2009; Gaynor, 2021).

The FTC and Department of Justice (DOJ) use screening tools such as the Herfindahl-Hirschman Index (HHI) and willingness-to-pay (WTP) metrics to identify potentially harmful mergers. However, researchers have argued these tools, though effective, are underutilized, leading to underenforcement. While past studies quantified the effects of mergers on inpatient prices, the broader impacts on outpatient prices and total spending had not been comprehensively analyzed until this study.

Data

The study relies on a robust dataset combining hospital mergers, market concentration measures, and pricing data:

1. Mergers Dataset: The researchers tracked hospital mergers between 2002 and 2020, identifying over 1,000 horizontal transactions among approximately 5,000 general acute care hospitals.

2. Pricing Data: Insurance claims data from three major insurers—Aetna, Humana, and UnitedHealthcare—covering 28% of the US population with employer-sponsored health insurance. This dataset provides granular information on negotiated prices for inpatient and outpatient services.

3. Market Concentration Metrics: The researchers calculated HHI scores based on hospital bed shares within defined markets and analyzed changes in WTP for merged entities.

4. Regulatory Data: Data on FTC enforcement actions and Hart–Scott–Rodino (HSR) reporting thresholds were included to assess regulatory visibility and interventions.

The final analytic sample focused on 322 hospital mergers involving 702 hospitals between 2010 and 2015, a period where both pre- and post-merger pricing data were available.

Methods

The study employs a difference-in-differences design to estimate the causal effects of hospital mergers on prices. The methods include:

1. Identification of Mergers: Hospitals were matched with control hospitals based on observable characteristics, ensuring comparability. The study excluded failing hospitals to avoid confounding effects from financial distress.

2. Screening for Anticompetitive Behavior:

   • HHI Analysis: Mergers resulting in post-merger HHI increases of 200 points or more and total HHIs exceeding 2,500 were flagged as presumptively anticompetitive, per the DOJ/FTC Horizontal Merger Guidelines.

   • WTP Analysis: Mergers that increased WTP by 5% or more were flagged as likely to raise prices significantly.

3. Price Effects: The researchers estimated post-merger price changes for inpatient, outpatient, and composite services, focusing on variations between flagged and non-flagged mergers.

4. Spending Impact: The team calculated the financial impact of price increases on spending for the privately insured population.

Robustness checks included alternative market definitions, variations in control group selection, and sensitivity analyses to account for methodological limitations.

Findings/Size Effects

The study provides compelling evidence that hospital mergers significantly raise prices, particularly when they lessen competition:

1. Overall Price Effects: The average merger increased hospital prices by 1.6% within two years, with inpatient and outpatient prices rising by 1.1% and 1.8%, respectively. Outpatient price increases were at least as large as inpatient effects, a finding that expands the scope of prior literature.

2. Flagged Mergers:

   • Mergers flagged by HHI criteria raised prices by 5.2% on average, with inpatient prices increasing by 5.4% and outpatient prices by 4.5%.

   • Mergers flagged by WTP criteria also led to significant price increases, particularly for inpatient services, where flagged transactions increased prices by 4.6%.

3. Spending Impact: An average year of hospital mergers (approximately 53 transactions) raised health spending on the privately insured by $204 million annually. These spending increases surpassed the annual antitrust enforcement budget of the FTC.

4. Regulatory Visibility: Nearly 60% of hospital mergers fell below HSR reporting thresholds. However, half of the mergers that predictably raised prices were above these thresholds, indicating that many problematic transactions were visible to regulators but not acted upon.

5. Underutilization of Screening Tools: While the FTC intervened in 8 cases during the studied period, approximately 97 mergers could have been flagged as anticompetitive using standard screening metrics.

   
   

Conclusion

The findings suggest that antitrust enforcement in the US hospital sector has been insufficient to prevent anticompetitive mergers, resulting in higher healthcare costs for consumers. The study concludes that existing screening tools, including HHI and WTP, are effective in predicting harmful mergers but are underused. Many flagged mergers with large predicted price increases proceeded without intervention, reflecting systemic underenforcement rather than flaws in analytical methods.

Policymakers and regulators are urged to strengthen antitrust enforcement in healthcare, particularly by expanding FTC resources, lowering HSR thresholds, and addressing state-level legal impediments like Certificates of Public Advantage (COPAs). Without such reforms, continued consolidation in the hospital sector could exacerbate cost pressures and reduce competition, undermining the broader goals of affordability and accessibility in US healthcare.