Health Care Markets Revisiting the Relationship between Managed Care and Hospital Consolidation

Objective. This paper analyzes whether the rise in managed care during the 1990s caused the increase in hospital concentration. Data Sources. Weassemble data from theAmericanHospital Association, InterStudy and government censuses from 1990 to 2000. Study Design. We employ linear regression analyses on long differenced data to es-timate the impact of managed care penetration on hospital consolidation. Instrumental variable analogs of these regressions are also analyzed to control for potential endogeneity. Data Collection. All data are from secondary sources merged at the level of the Health Care Services Area. Principle Findings. In 1990, the mean population-weighted hospital Herfindahl– Hirschman index (HHI) in a Health Services Area was.19. By 2000, the HHI had risen to.26. Most of this increase in hospital concentration is due to hospital consolidation. Over the same time frame HMO penetration increased three fold. However, our re-gression analysis strongly implies that the rise ofmanaged care did not cause the hospital consolidation wave. This finding is robust to a number of different specifications. Key Words. Managed care, hospitals, mergers, consolidation, competition During the 1990s,managed care displaced indemnity insurance to become the dominant form of health insurance in the private sector (Glied 2000). Over the same period, a wave of hospital mergers, acquisitions, and hospital system expansions occurred. In 1990, the mean, population weighted, hospital con-centration, measured with the Herfindahl–Hirschman index (HHI)1 in Health Services Areas (HSA) was 0.1913. By 2000, it had risen to 0.2596. Over 90 percent of the increase in concentration is a consequence of mergers, acqui-sitions, and hospital system expansions.2 Understanding the determinants of hospital market power allows the development of policies to manage hospital market power, which is importan