The creation of economic efficiencies in hospital mergers

Antitrust evaluation of proposed mergers requires the assessment of merger-created efficiencies, the beneficial effects of which may swamp any competitively adverse effects of higher market concentration. There are many potential sources of such efficiencies, and this paper investigates one that has been largely overlooked. Because merger often makes it possible to consolidate two small clinical departments into one larger unit, it can reduce the relative variability - the "peak load problem" - of daily patient census. This in turn makes it possible to reduce the costs of staffing adequately for random periods of high demand. Based upon a sample of two years of daily admissions data for several merging hospitals, and confirmed with data averaged over all U.S. hospitals, the efficiency effects of such clinical consolidation are estimated to be a substantial percentage of affected operating costs.