In the five years leading up to 1998, executives and boards of US hospitals—convinced that if they grew larger they would be able to draw more patients, to leverage significant economies of scale, and to command higher prices from payors—consummated nearly 750 mergers and alliances.

(Terms printed in italics are defined in the glossary)

Yet second thoughts are now emerging. How much value has consolidation created? Are institutions really better off in local hospital networks and integrated health care systems than they were standing alone? Today, these are real questions.

Not long ago, we analyzed 300 transactions involving recently merged hospitals, comparing them with their independent counterparts in the same statistical market service areas. The study suggests that the economic advantages local hospital networks were expected to derive from con-solidation have largely eluded them. National for-profit hospital chains have certainly prospered through expansion. But they have benefited less from the structural advantages of combining assets than from the more exacting challenge of transferring, or "arbitraging," important skills from one facility to another.

As health care markets in the United States continue their journey into a turbulent and more fiercely competitive future, it is time for the country’s...