Dranove D & Ludwick R, (1999)

‘Competition and Pricing by Non-profit Hospitals:
A Reassessment of Lynk’s Analysis’

Journal of Health Economics Vol. 18, No. 1, pp. 87-98

• Analyses the effect of hospital mergers on treatment prices.
• Reassesses the results of Lynk (1995) who argued that the effect of concentration on price may be different for nonprofits than for-profits
• Lynk concluded that merging nonprofit hospitals would, on average, lower prices.
• The authors here argue that Lynk makes two methodological choices that may impart serious biases:
  1. He uses the coefficient on market share to compute the effect of a merger on price. This may create simultaneity bias as the direction of causality between market share & price is ambiguous.
  2. Hospital admission is heterogeneous creating a potential omitted variable bias because key predictors (market share & the Herfindahl index) may be correlated with unmeasured quality and/or illness severity.

Key results:

• After correcting these perceived flaws in Lynk’s econometric analysis, the authors find that mergers by non-profit hospitals are indeed associated with higher prices.
• In other words, non-profit hosiptals do appear to exercise market power, just as for-profit hospitals do.
• This paper thus represents a comprehensive critique of a paper cited by a court judge in his decision not to block a merger of two non-profit hospitals.

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