DO MERGERS REALLY REDUCE COSTS? EVIDENCE FROM HOSPITALS

Authors

  • TERESA D. HARRISON

    1. Harrison: Associate Professor, Department of Economics, LeBow College of Business, Drexel University, Philadelphia, PA 19104. Phone 215-895-0556, Fax 215-895-6975, E-mail tharrison@drexel.edu
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    • I am grateful to the Social Science Research Council for financial support and the Management Science Group, US Department of Veterans Affairs for providing data. I also thank Paul W. Wilson, Partha Deb, Martin Gaynor, Bruce D. McCullough, and seminar participants at the Eastern Economic Association Conference and International Industrial Organization Conference for helpful comments. Any remaining errors are my responsibility.


Abstract

In this paper, we compare potential and realized cost savings from hospital mergers. Our approach isolates changes in realized cost savings due to different output mixes from systematic changes due to time and also provides a measure of the potential cost savings due to scale economies. Our findings suggest that economies of scale are present for merging hospitals and they realize these cost savings immediately following a merger. However, we also show that over time, cost savings from the merger decrease and the proportion of hospitals experiencing positive cost savings declines. (JEL L1, I11, C14)

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