Friday, September 25, 2015

Is big better?

TOPICS: Health Economics, Mergers
SUMMARY: Five years after the Affordable Care Act helped set off a health-care merger frenzy, the pace of consolidation is accelerating, transforming the medical marketplace into a land of giants.
CLASSROOM APPLICATION: Instructors can present the factors that are causing horizontal and vertical mergers in hospital systems. They can also introduce increased profit of the systems as the goal of mergers, and present that economies of scale and scope or increased market power lead to the increased profits.
QUESTIONS: 
1. (Introductory) What factors are causing mergers in health-care systems? What is "horizontal integration"? What is "vertical integration"? Why do these mergers involve both horizontal and vertical integration?

2. (Advanced) What are "economies of scale" and "economies of scope"? Do economies of scale and scope exist in the health-care industry?

3. (Advanced) Do mergers in health-care systems increase the market power of the systems?

4. (Advanced) Moody's Investors Service found that the median operating margin for the 50 largest nonprofit hospital systems it monitors was 3.4% last year, but for the 50 smallest it was just 1.5%. Does this fact indicate economies of scale and scope in health-care systems? Does it indicate market power?
Reviewed By: James Dearden, Lehigh University
Organizational structure
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