The Effect of Mergers on Firms' Costs

Evidence from the HMO Industry

Published in: Quarterly Review of Economics and Finance, v. 44, no. 4, Sep. 2004, p. 574-600

Posted on RAND.org on January 01, 2004

by John Engberg, Douglas Wholey, Roger D. Feldman, Jon B. Christianson

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The authors examine the effect of mergers on firmsb2s costs, using a national data set that contains information on both pre- and post-merger costs for firms in the Health Maintenance Organization (HMO) industry. By utilizing data on all HMOs that operated in the United States from 1985 to 1997, we observe enough mergers to obtain estimates of both short-run and relatively permanent merger effects. On average, the authors do not find evidence that mergers allowed HMOs to realize greater economies of scale or that mergers improved efficiency by shifting the cost function. On the other hand, mergers between HMOs that produce Medicare and other products are likely to create dis-economies of scope that increase costs.

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