Question

10. How would you expect hospital mergers to affect the level of market competition and price of care? What would happen to the Herfindahl-Hirschman index? Explain.

Answer 1

When hospital mergers takes place, then a number of different hospital entities will decrease in the market in a post merger scenario. It will decrease the market competition and price of health care services will increase as the market has less players in the market. Further, mergers between the hospitals will increase the size of the entity that can apply anti-competitive policies. It will also make market competition to decrease and price of care to increase.

It will cause  Herfindahl-Hirschman index to increase and it will happen to reflect that market concentration is increasing after the merger.

For example, if there are five hospital firms with 20% market share each:

HHI = 20^2 + 20^2 + 20^2 + 20^2 + 20^2 = 2000

If two hospital firms merge, then:

New HHI = 40^2 + 20^2 + 20^2 + 20^2 = 2800

We can now see that HHI has increased.