Review of Industrial Organization
12: 185–202, 1997.
1997 Kluwer Academic Publishers. Printed in the Netherlands.
Multihospital Chain Acquisitions and Competition
in Local Health Care Markets
LEE RIVERS MOBLEY
Economics Department, School of Business Administration, Oakland University, Rochester,
Michigan 48309-4401, U.S.A.
Abstract. This paper examines the determinants of multi-hospital acquisitions in California during
a period of increased competition, 1984–1993. Evidence is examined for differences by chain type
in acquisition preferences in the face of increased competitive pressure. Signiﬁcant differences are
found among chain types (for-proﬁt, non-proﬁt , and church). All three types appear to position
themselves through acquisitions to obtain multiple-hospital holdings within local markets, with the
non-proﬁt type exhibiting the greatest tendency. Such positioning may enhance efﬁciency in payor
contracting and increase market power, lowering competition in the long run.
Key words: Hospital competition, managed care, hospital industry structure, hospital strategy.
The US healthcare industry has seen massive restructuring in response to the trend
toward managed care dominance of the health insurance industry.
tion among hospitals has emerged with the practice of selective contracting between
hospitals and managed care plans.
The managed care revolution is accompanied
by rapid advances in both medical technologies and information systems. In this
environment, hospitals who succeed must be able to embrace these advances, in
order to enhance their ability to deliver and market high-quality outcomes at a
These changes have increased the optimal scale of hospitals, and changed the
structure of the health care enterprise. Between 1989–1993, about 1,318 separate
corporate acquisitions took place, with combined value in the billions of dollars
(Danzon, 1994). In the hospital sector, horizontal mergers reached unprecedented
numbers in the eighties (AHA News, 1992) and have escalated in the nineties (Wall
Street Journal, 1993). Hospitals’ expectations regarding participation in merger
and consolidation have also changed in the recent past. While a 1988 survey of
hospital administrators found that less than half expected to be affected by merger,
Between 1988 and 1993, the percentage of privately insured individuals in managed care plans
rose from 27.1% to 65.4% (PROPAC, 1995, p. 23).
The increase in price competition with growth in managed care sectors has been well documented
(Feldman et al., 1990; Melnick et al., 1992).