Airline Mergers vs. Hospital Mergers

Sep 14, 2013 by Adam C. Powell, Ph.D.

Given the large number of recent hospital mergers, and the attempted merger between American Airlines and U.S. Airways, some may wonder whether both airline mergers and hospital mergers have the same impact on their respective markets. I believe that they do not.

While at a first glance, there appears to be substantial similarity between airline mergers and hospital mergers, there are fundamental differences between the two industries which make hospital mergers less threatening. Airlines and hospitals both compete for geographic markets which vary in their level of competition. Remote areas are unlikely to be served by many hospitals or airlines, and as a result, the immediate competitive impact of a merger is likely to be more substantially felt than in a major city. However, the barriers to opening a new hospital in a market are far lower than the barriers to opening a new airline in a market.

Of the roughly 5,000 American community hospitals, about 2,000 are not part of a system. Needless to say, there are no airlines that have gate privileges at only one airport – unless you count the ones flying people in loops over scenic areas. While both airlines and hospitals experience economies of scale and increased negotiation power from scale, independent hospitals and small hospital systems are more viable than small airlines. When high pricing opens a market opportunity, a new hospital can independently emerge or can be formed by one of the nation’s numerous different systems. While attempted hospital mergers have in some cases resulted in regulatory action, the long-term impact of such mergers is likely to be less profound than that of airline mergers.