Dranove D & Ludwick R, (1999)

‘Competition and Pricing by Non-profit Hospitals: A Reassessment of Lynk’s Analysis’

Journal of Health Economics Vol. 18, No. 1, pp. 87-98

Analyses the effect of hospital mergers on treatment prices.
Reassesses the results of Lynk (1995) who argued that the effect of concentration on price may be different for nonprofits than for-profits
Lynk concluded that merging nonprofit hospitals would, on average, lower prices.
The authors here argue that Lynk makes two methodological choices that may impart serious biases:
1. He uses the coefficient on market share to compute the effect of a merger on price. This may create simultaneity bias as the direction of causality between market share & price is ambiguous.
2. Hospital admission is heterogeneous creating a potential omitted variable bias because key predictors (market share & the Herfindahl index) may be correlated with unmeasured quality and/or illness severity.

After correcting these perceived flaws in Lynk’s econometric analysis, the authors find that mergers by non-profit hospitals are indeed associated with higher prices.
In other words, non-profit hosiptals do appear to exercise market power, just as for-profit hospitals do.
This paper thus represents a comprehensive critique of a paper cited by a court judge in his decision not to block a merger of two non-profit hospitals.