Increase in Cross-Market Hospital Systems May Hurt Market Competition

Over half of hospitals that underwent a merger or acquisition between 2010 and 2019 were located in a different commuting zone than the acquirer, signifying a rise in cross-market hospital systems and cross-market power, according to a Health Affairs study.

A cross-market hospital merger occurs when the merging hospitals do not compete for the same patients due to location or services offered. Cross-market mergers can impact stakeholders differently.

Since payers need to include hospitals across markets in their network, they could potentially enable cross-market hospital systems to exert market power across the markets when negotiating contracts.

Meanwhile, cross-market hospital systems have led to higher prices for patients. Experts attribute this increase to several different theories.

First, hospital systems can require payers that are contracting with one hospital in the system to also contract with another hospital or, in some cases, all hospitals in the system.

Cross-market hospital systems can also leverage their hospitals when negotiating with payers because of their ability to satisfy payers’ hospital network needs. In addition, two hospital systems competing in multiple markets could lead to them competing less aggressively in one market to maintain competition in other markets.

Researchers used data from the American Hospital Association (AHA) Annual Survey Database from 2009 to 2019 to identify cross-market hospital systems and mergers.

The share of community hospitals that were part of hospital systems increased from 58 percent in 2009 to 67 percent in 2019, resulting in 3,436 hospitals within 368 systems. Within a commuting zone—zones that link workers to places of employment—the average market share of admissions was 13 percent for independent hospitals and 23 percent for hospital systems.

Between 2010 and 2019, 1,500 hospitals were acquired by or merged with a hospital system. Of these hospitals, 55 percent were located in a different commuting zone than the acquirer. The share of systems that were cross-market systems grew from 53 percent in 2009 to 59 percent in 2019

Researchers used this data to calculate the number of hospitals in urban commuting zones that could benefit from enhanced cross-market power, resulting from being part of a system with a dominant market share in another commuting zone.

They found that the number of hospital systems that could exert heightened cross-market power increased from 37 in 2009 to 57 in 2019, signifying a 54 percent increase. The 57 hospital systems each had an average of ten hospitals and included 21 state systems, 14 census division systems, four census region systems, and 18 national systems.

“Given that more than half of all hospital mergers during 2010–19 qualified as cross-market, this trend is worthy of investigation into its effects on market competition,” researchers wrote.

“Yet none of these mergers was challenged on cross-market grounds because the pervading view is that these entities did not compete in the same product and geographic markets, and therefore, these mergers could not be anticompetitive.”

However, emerging evidence has shown that cross-market mergers can hurt competition through all-or-nothing contracts with payers and mutual forbearance between hospital systems.

Antitrust enforcement for cross-market mergers may prove difficult, as there is limited understanding of the competitive dynamics of contracting with large cross-market health systems, the study stated. Nevertheless, economists and antitrust enforcers should investigate price increases that stem from these mergers to determine which deals may harm competition in healthcare markets.