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Diversion Analysis as Applied to Hospital Mergers: A Primer

Subramaniam Ramanarayanan, NERA, Insight in Economics, June 2014

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Driven by a variety of factors, including changes in the reimbursement environment and the need to have scale to successfully bear risk and support delivery models that emphasize population-based health management, merger activity among hospitals has been robust over the last couple of years. In fact, the annual number of transactions is nearly double what it was five years ago. With continued debate over the benefits of hospital consolidation and whether these benefits outweigh a possible harm to competition, hospital mergers have come under renewed scrutiny from the Federal Trade Commission (FTC) and, on occasion, the Department of Justice’s (DOJ’s) Antitrust Division. Coincident with this increased scrutiny has been a change in the tools used by these agencies in the analysis of hospital mergers. Many credit these new tools—such as hospital merger simulation, the Willingness-to-Pay (WTP) framework, and diversion analysis—with explaining the recent string of successes the FTC has had in litigating hospital merger cases. With the use of these news tools, the analysis of hospital competition has moved away from patient flow-based methods towards more structural models that aim to better capture the underlying dynamics of the industry and come up with a prediction for the impact of the transaction on prices.

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