Tacit collusion among hospitals in price competitive markets

Abstract

Horizontal and vertical mergers, and coalition and network building activity have recently escalated in the US hospital industry in response to actual and threatened increases in competition. Parties to this industry's consolidation state that increased efficiency is the primary motive. However, increased consolidation may lead to increased awareness of inter-dependence, and facilitate conscious parallelism, or tacit collusion. In conjunction with this, selective contracting practices by payors with hospitals for negotiated prices may have increased the awareness of interdependence among price-competing hospitals. We posit that cost asymmetries arising from first-mover advantages to merged hospitals and multihospital chain members may be used strategically in local markets to facilitate tacit arrival at profit maximizing prices. Thus, hospital mergers and acquisitions which enhance efficiency in the short run may not yield net gains to society in the long run, as they may alter incentives which parameterize the potential for implicit cooperation. This outcome depends upon mitigating local market conditions, such as capacity utilization and market power held by payors. The current view that safeguarding emerging price competition is important necessitates careful analysis of how merger is likely to affect bargaining power between hospitals and purchasers. This complexity precludes the use of simple antitrust rules or guidelines in this industry.