Two Hospital Mergers on Chicago’s North Shore: A Retrospective Study Deborah Haas-Wilson Smith College Christopher Garmon* Federal Trade Commission *The views expressed in this paper are the authors’ and not necessarily those of the Commission or any individual Commissioner.

2 Background 1990’s: –FTC/DOJ/CAAG: 0/6 in hospital merger PIs –Broad geographic markets w/ Elzinga-Hogarty test –Non-profit ownership status (Lynk(1995)) : No hospital merger challenges 2002: –FTC: Hospital Merger Retrospectives Project Objectives: –Look for consummated anticompetitive mergers –Increase understanding of merger effects Mergers studied: –ENH/Highland Park (Evanston, IL) –Victory/St.Therese (Waukegan, IL) –Alta Bates/Summit (East Bay, CA): Tenn (2008) –New Hanover/Cape Fear (Wilmington, NC): Thompson (2009)

3 The Mergers ENH/Highland Park: –Evanston Northwestern Healthcare (ENH): Evanston Hospital –Large “tertiary” hospital –Associated w/ Northwestern Univ. Medical School, but not its primary teaching hospital Glenbrook Hospital –Small community hospital –Highland Park Hospital (HPH) Mid-size community hospital About 15 miles from both Evanston and Glenbrook Victory/St.Therese: –Victory Memorial Hospital (VMH) –St. Therese Medical Center (STMC) Both mid-size community hospitals Only hospitals in Waukegan, 2 miles apart

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5 Empirical Approach Difference in Differences –Dependent Variable: ln(price) –DID Independent Variable: Post*MH –Post: post-merger indicator –MH: merged hospital indicator –Other Independent Variables: Post Casemix Medicare+Medicaid share Residents and interns per bed Hospital indicators Health insurance product indicators (e.g., PPO) Year indicators –Level of observation: hospital discharge

6 Empirical Issues Control groups: –Near vs. far Near: likely same demand/cost conditions, but rival effects Far: no rival effects, but different demand/cost conditions –For both mergers: Chicago PMSA hospitals Non-merging Chicago PMSA hospitals –For ENH/HPH: Chicago PMSA teaching hospitals Chicago PMSA major teaching hospitals –For VMH/STMC: Chicago PMSA community hospitals

7 Empirical Issues Casemix adjustment: –CMS Diagnosis Related Groups (DRG) Dummies Weights –3M All Patient Refined Diagnosis Related Groups w/ Severity of Illness ranking (APRDRGSOI) –Also length of stay (LOS)

8 Data Three data sets: 1.MCO (i.e., payer) data –Pro: actual prices –Con: “claims” data w/ aggregation issues 2.IDPH data –Pro: audited discharge data –Con: prices estimated with net/gross revenue ratio from CMS Cost Reports 3.Hospital data –Pro: discharge data w/ all payers –Con: no control groups

9 Results: Hospital Data: %Change IP Net Revenue/Case (FY99-FY02)

10 Results: MCO Data: %Price Change ENH/HPH

11 Results: IDPH Data %Price Change ENH/HPH

12 Results: MCO Data: %Price Change STMC/VMH

13 Results: IDPH Data %Price Change STMC/VMH

14 Summary ENH/HPH: –Large statistically significant relative price increases for 4 of 5 MCOs and overall STMC/VMH: –Mixed results: price increases for some, decreases for others –Overall, no effect or slightly lower prices Alta Bates/Summit (Tenn (2008)) –Large statistically significant price increase at Summit, but not at Alta Bates New Hanover/Cape Fear (Thompson (2009)): –Mixed results: price increases for some, decreases for others

15 Lessons 1.Merger effects vary across payers Some payers may be more vulnerable to mergers than others Cannot deduce merger effects from limited sample of payers 2.Large price increases are possible in urban/suburban areas New methods are needed for geographic market definition, particularly in large MSAs 3.Merger of close substitutes “on paper” does not necessarily lead to price increases Perceived quality and other unmeasurable factors may be more important determinants of merger effects