In the late 1980s, the Prospective Payment System and the expansion of managed care plans forced hospitals to be cost efficient. The increased number of hospital mergers suggests that merging is a way to become more efficient to ensure long-run survival. This study presents an economic framework and empirical analysis to test the existence of multiproduct scope and scale economies among merged and control hospitals prior to the merger, and one year and two years after the merger, using the AHA data from 1987 to 1990. Results support the operational efficiency hypothesis as the reason for merger.
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