In early 2007, a chain of just under 40 hospitals became the target of a bigger rival, one of the United States’ largest for-profit hospital operators at the time. The buyer had a history of growth through acquisitions, and an ambition to expand further. And while the price for the target chain—almost $7 billion in cash and debt—seemed high to some analysts, the acquiring group’s leadership team had plans they felt justified the premium, including expanding its patient-records system to the new hospitals and installing their own managers.

“Our operating strategy has always been built around developing standardized and centralized business practices across most aspects of our business,” read the group’s annual report. “We will focus our expertise on the further expansion of this model to drive improved returns on these additional assets.”

But in an analysis, researchers find that the strategy did not deliver the results the company envisaged—and that those disappointing outcomes could have been predicted and avoided. The case study holds lessons for other companies, as well as investors and regulators, the findings indicate.

“It’s not like the company failed to do what it said it would do,” says Chicago Booth’s Chad Syverson, who conducted the research with colleagues at Carnegie Mellon, Columbia, and Harvard. “But the tasks it outlined were about inputs like electronic medical-records systems and management practices. However, the success or failure of a hospital merger should ultimately be based on outputs such as patients’ health outcomes and the hospital’s financial performance.”

To understand the impact of the deal on both the target’s and the acquirer’s hospitals, the researchers examined data gathered by the American Hospital Association, Medicare, and the World Management Survey. Looking at factors ranging from costs to CEO churn, readmission rates, and profit margins, they compared both sets of hospitals against a larger control group of for-profit hospitals.

Ahead of the takeover, the targeted hospitals appeared by several measures to be stronger operators than those already in the buyer’s portfolio, the researchers point out. Their profit margins and patient survival rates were higher, and their readmission and physician-churn rates were lower.

Under new ownership, “prices [at the newly acquired facilities] rose, but so did costs, with little detectable impact on quality of care,” according to the analysis. The target hospitals’ financial returns didn’t improve.

Meanwhile, profitability at hospitals in the buyer’s original stable steadily declined and had, by seven years after the purchase, fallen 3 percent relative to other for-profit hospitals. This might have been the result of neglect, says Syverson. “Management may have dropped the ball on the old hospitals because they were focusing on integrating the new facilities.”

The experience has lessons for other deals, the research suggests. Investors might spot an acquiring company’s faulty reasoning—and so, too, might regulators, whose less credulous view of efficiency claims could help highlight when the economic benefits of a deal have been overstated. Efficiencies that never materialize can’t trickle down to consumers, of course, and should not be used as justification for the harms of reduced competition, argue some antitrust researchers.

Syverson believes these considerations should play a bigger role in antitrust decisions—but warns this might overstretch competition authorities. “They’ve been trained to look at prices,” he says. “A new approach would require more resources.”

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