How suspicious would you be if your doctor suddenly prescribed you double the dose of a regular medicine you take? What if you were receiving double the normal dose right from the first prescription?
In the paper "How acquisitions
affect firm behavior and Performance: evidence from the dialysis industry",
researchers Paul J. Eliason, Benjamin Heebsh , Ryan C. Mcdevvit and James w.
Roberts explore what happened to American dialysis centers and their patients
once the center was bought by a large for-profit dialysis chain. In short:
costs were cut, revenues were increased, and the patients were worse off.
The paper shuns a light on the less documented aspects of
companies’ acquisitions – the non-price effects. It is well documented that mergers and acquisitions cause price increases, yet the effects of acquisitions on other consumer related
aspects, such as service quality or product offerings are not so well
understood and are a current topic of many ongoing and recently published studies.
Journalistic and governmental investigations had provided
initial evidence that acquisitions can have adverse effects on consumers through
reductions of quality of service. This research is one of the firsts to
document a systematic non-price related adverse effect of acquisitions on consumers.
The paper examines the market for dialysis treatments in the
U.S. between the years 1998 – 2010. As explained in the paper, dialysis is
(usually) a lifelong medical procedure people with kidney failure have to undergo
regularly, in order to filter waste and toxins out of their blood. Since kidney
failure leads to anemia, patients receive in addition to the dialysis treatment, injectable drugs to treat
anemia. In dialysis centers patients receive two services: dialysis
procedures and drugs injections.
In the U.S. all patients diagnosed with a kidney failure are
eligible for Medicare coverage (the government’s national health insurance
program). Medicare pays more than $33 billion a year for costs associated with
treatment of kidney failure. This is approximately 1% of the entire federal
budget!
As the U.S. government pays dialysis centers a fixed fee per
service, dialysis for-profit centers have two main ways to increase revenues:
increase revenues from drug injections, and treat more patients in a given
time. And this is exactly what is documented in the paper.
The researchers show that drug doses nearly doubled for patients who were treated in independent dialysis centers that were acquired by a large chain. As a result patients in these centers had increased likelihood to experience a cardiovascular event.
How does doubling drug doses increase revenues?
Large chains have much higher profit margins from drugs injections,
(i.e. the difference between the government drug injections reimbursements and
the wholesale prices they pay to the manufacturers is higher). This is because
large chains order significantly higher quantities of drugs in order to supply
their centers across the whole country. This puts them in a better
position to negotiate lower wholesale prices and receive higher quantity
discount from the drugs manufacturers.
Examining patient outcomes, the researchers document that in
a newly acquired center a patient has a higher probability (a 4.2% increase) of
being hospitalized, is experiencing a 2.9% decrease in the likelihood to
survive 730 days after start of dialysis treatment, and a new patient in a
newly acquired center is 9% less likely to be placed on a waitlist or receive a
kidney transplant.
Why independent centers don’t mimic the large chains strategies from the start?
Independent centers pay higher wholesale prices for the
administrated medications. Even if they were they to double the administrated doses in their facilities, they wouldn't be able to such high levels of orders as the large chains – the researchers calculated that if an
independent center would have administrated similar drug doses as large chains do, they would have earned only 55% of their recorded profits.
Can competition between dialysis centers increase the quality offered?
Many economic theories show that competition benefits
consumers and can hinder firms from pursuing strategies that harm consumers.
Therefore the researchers examined whether competition can increase the quality
of service patient receive at dialysis centers. Since prices in the industry
are regulated by the government, the only way centers can compete for patients
is through quality of service. Therefore they hypothesized that in areas with
many centers, dialysis centers might try to attract more patients by increasing
their quality of service. It seems though that it is not the case. The
researchers find no effect of competition on any of the patients and treatment
outcomes. It seems that in the U.S., patients don’t respond to a decline in
quality, and in general are reluctant to change dialysis centers – only 1.3% of
their observations ( a patient – month combination) are switching centers.
Antitrust laws govern the process of approving firms’ mergers and acquisitions . Under current laws, an acquisitions (or merger) is allowed to take place if it can be shown that it will not reduce the competition in the market in a significant way. This is due to the assumption that in the presence of alternatives consumers will vote with their feet and punish firms that offer non-sufficient quality. The paper highlights the ignored social costs when focusing solely on measures of competition while ignoring the background of the industry and its consumer behavior – people receive worse medical treatment.
Two potential explanations come to my mind for why consumers
don’t vote with their feet when it comes to dialysis treatments. They might not
have enough information to determine the quality of their treatments. How would
they know they are receiving a super-sized drug dosage? But even if they were
to be able to accurately determine the quality of their service, do sick people
really can vote with their feet?
My personal intake from this paper is the importance of
information, without it one cannot assess the quality of a product/service
she is receiving. Information nowadays is more accessible than ever before, yet
not enough. Publishing official treatment guidelines to the general public
might be helpful to mitigate the information problem, though since in medicine
one size cannot fit all, it is not a trivial task. On the other side,
publishing alone is not helpful if no patient actively seeks that information.
To see how the researchers arrived to the presented results
and discover many other results the researchers uncovered you can read the full paper following this link: https://faculty.fuqua.duke.edu/~rcm26/ESRD_mergers.pdf
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