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Geographic markets in hospital mergers: a case study

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  • John Simpson

Abstract

In three recent hospital merger cases, the courts concluded that the merged hospital would be unable to increase price profitably because of competition from distant hospitals. In reaching this conclusion, the courts found the following: hospitals earn high margins on the last patients that they serve; given these high margins, a small price increase would be unprofitable if even a relatively small percentage of patients switched to other hospitals; many of the merging hospitals' patients live in 'contestable' zip codes, where a large percentage of patients already use other hospitals; a price increase at the merging hospitals would prompt a large number of these patients to switch to other hospitals; and this amount of switching would make the price increase unprofitable. This article argues that the courts in these cases erred in accepting the defendants' argument that switching by patients living in 'contestable' zip codes would make a price increase at the merging hospitals unprofitable. Specifically, this article examines the behavior of patients following a merger similar to those analyzed by these courts and finds that a large price increase prompted little switching by patients living in 'contestable' zip codes.

Suggested Citation

  • John Simpson, 2003. "Geographic markets in hospital mergers: a case study," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 10(3), pages 291-303.
    • Handle: RePEc:taf:ijecbs:v:10:y:2003:i:3:p:291-303
    DOI: 10.1080/1357151032000126247
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    1. Michael G. Vita & Seth Sacher, 2001. "The Competitive Effects of Not‐for‐Profit Hospital Mergers: A Case Study," Journal of Industrial Economics, Wiley Blackwell, vol. 49(1), pages 63-84, March.
    2. Simpson, John, 1995. "A note on entry by small hospitals," Journal of Health Economics, Elsevier, vol. 14(1), pages 107-113, May.
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    5. Frech, Ted E, 1998. "Managed Care, Distance Traveled, and Hospital Market Definition," University of California at Santa Barbara, Economics Working Paper Series qt84x5q49q, Department of Economics, UC Santa Barbara.
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    Cited by:

    1. Martin Gaynor & Kate Ho & Robert J. Town, 2015. "The Industrial Organization of Health-Care Markets," Journal of Economic Literature, American Economic Association, vol. 53(2), pages 235-284, June.
    2. Martin S. Gaynor & Samuel A. Kleiner & William B. Vogt, 2013. "A Structural Approach to Market Definition With an Application to the Hospital Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 61(2), pages 243-289, June.
    3. Orley Ashenfelter & Daniel Hosken & Michael Vita & Matthew Weinberg, 2011. "Retrospective Analysis of Hospital Mergers," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 18(1), pages 5-16.

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    Keywords

    Hospital Mergers; Geographic Markets;

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