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Hospital mergers, not consolidation of local hospitals into systems, result in cost savings

Hospitals have been consolidating with local competitors at an unprecedented pace over the last decade. On the one hand, consolidation may be associated with gains in efficiency and reduced costs. On the other hand, consolidation may also lead to higher hospital prices.

Although consolidation of local hospitals into systems does not generate significant cost savings, even after 4 years, there are significant and persistent savings for mergers of two independent hospitals 2, 3, and 4 years after merger, according to a study by David Dranove, Ph.D., of Northwestern University, and Richard Lindrooth, Ph.D., of the Medical University of South Carolina. The study was supported by the Agency for Healthcare Research and Quality (HS10730).

In local multi-hospital systems, two or more hospitals in the same geographic market have common ownership but maintain separate physical facilities, do business under separate licenses, and keep separate financial records. In local mergers, two or more hospitals in the same market have common ownership, do business under a single license, report unified financial records, and may or may not consolidate some physical facilities.

In this study, the investigators compared 81 hospitals that merged with 810 similar hospitals that did not merge, and 41 hospitals that consolidated into systems with 410 similar hospitals that did not consolidate between 1989 and 1996. They based their analysis on data from the American Hospital Association's Annual Survey of Hospitals, the Medicare Cost Report, and the Area Resource File.

The median system acquisition was associated with an insignificant cost reduction of 2.2 percent after 2 years, 0 percent after 3 years, and 3 percent after 4 years. The median merger averaged cost savings of about 14 percent, 2, 3, and 4 years after merger. These findings confirm what many hospital executives involved in system consolidations have already expressed. System consolidation does not yield synergistic cost savings, perhaps reflecting the difficulty of achieving efficiencies without combining operations.

More details are in "Hospital consolidation and costs: Another look at the evidence," by Drs. Dranove and Lindrooth, in the November 2003 Journal of Health Economics 22, pp. 983-997.

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