1995 saw a huge leap in the number of hospital mergers and alliances in the United States, primarily in response to the expansion of managed care systems that have forced down hospital prices and utilization rates. That year, there were 138 separate deals involving 269 hospitals, a 48 percent increase over the 1994 activity level.1 The assumption underlying these mergers is that multi-hospital systems (MHS) will not only enjoy economies of scale, but be able to bargain more effectively with health maintenance organizations (HMOs), medical equipment suppliers and physicians because of high market share and consequently greater market power. The net result should be improved performance. However, evidence to date indicates MHS do not necessarily outperform independent hospitals.
Are MHS more profitable than independent hospitals?
When performance is measured broadly across many markets as return on sales (ROS), MHS fail to outperform stand-alone hospitals (Exhibit 1). However, these numbers could mask differences in hospital performance caused by different levels of managed care penetration in different markets, and the number and relative size of the hospital players in each market. The degree of HMO penetration in a given market, for example, has a strong, statistically significant effect on hospital return...