How Acquisitions Affect Firm Behavior and Performance: Evidence from the Dialysis Industry

Abstract

Many markets have become increasingly concentrated through mergers and acquisitions, which in health care may have important consequences for spending and outcomes. Using a rich panel of Medicare claims data for nearly one million dialysis patients, we advance the literature on the effects of mergers and acquisitions by studying the precise ways in which providers change their behavior following an acquisition. We base our empirical analysis on more than 1,200 acquisitions of independent dialysis facilities by large chains over a twelve year period, and find that chains transfer several prominent strategies to the facilities they acquire. Most notably, acquired facilities converge to the behavior of their new parent companies by increasing patients’ doses of highly reimbursed drugs, replacing high-skill nurses with less-skilled technicians, and waitlisting fewer patients for kidney transplants. We then show that patients fare worse as a result of these changes: outcomes such as hospitalizations and mortality deteriorate, with our long panel allowing us to identify these effects from within facility or within-patient variation around the acquisitions. This decline in quality corresponds to an unambiguous decline in value for payers, as overall Medicare spending increases at acquired facilities, mostly as a result of higher drug reimbursements. We conclude our paper by linking these effects to measures of local market concentration, finding that an increase in market power cannot explain the decline in quality. Rather, the adoption of the acquiring firm’s strategies and practices drives our main results.