Nursing Home Quality Improvements through Merger

A successful merger creates wealth by moving an under-performing asset into a more valuable use. But does this wealth derive from the ability to extract more consumer surplus through higher prices for the same product? Or is it from the better management of poorly performing assets that generates more total surplus that need not decrease consumer surplus? Determining where on this spectrum a specific deal lies is the crux of economic antitrust policy. 

Chatterji, Ho and Li, have a new paper, "Mergers and Quality Provision in Healthcare: Evidence from Nursing Homes," that finds evidence of increased total surplus. Specifically, purchases of "independents" by "chain-owned" Skilled Nursing Facilities (SNFs) reduce health deficiency citations by 5% two years post-merger. New management improves quality. Looking deeper, this result is larger for acquiring chains that are smaller, chains with a higher-quality track record, and chains that make more acquisitions. Notably, the wealth creation appears to be from increased quality, and not from reduced costs, or increased market power.

My experience with this industry is that smaller, independent facilities may have begun with the best of intentions, and performance, but the founders were not able to keep this up indefinitely. Larger chains have processes, and especially succession plans, in place that allow facilities to maintain quality.