Comment on Joseph Farrell, David J. Balan, Keith Brand, Brett W. Wendling (2011), 'Economics at the FTC : Hospital Mergers, Authorized Generic Drugs, and Consumer Credit Markets'

In a review of “Economics at the FTC,” Farrell et al. (2011) discuss empirical methods FTC economists use to assess the potential price effects of prospective hospital mergers. The primary method is a framework based on proxies for the bargaining power of hospitals that are calculated from the estimated parameters of a model of patient hospital choice. The effect of these proxies for bargaining power on the reimbursement rates obtained by hospitals in negotiations with payors is then estimated using a reduced form specification. We discuss the limitations of this framework, and provide a few examples in which it may fail to predict the price effects of hospital mergers reliably, especially in the presence of restricted insurance networks