Geographic Markets in Hospital Mergers: A Case Study

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 paper 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 paper 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.