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Capitol Hill Briefing

Consolidation in Health Care Likely to Continue

Eastman, Peggy

doi: 10.1097/01.COT.0000479756.77677.b8
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WASHINGTON—Consolidation in all sectors of the health care industry has been occurring rapidly and is likely to continue. That is the not-really-surprising conclusion of speakers here at a Capitol Hill news briefing sponsored by the Commonwealth Fund and the Alliance for Health Reform.

“Health systems are merging with and acquiring other health systems... the pace seems to be accelerating as well,” said Edward F. Howard, JD, President of the Alliance for Health Reform. “Physician practices are increasingly integrated with hospitals,” added Eric C. Schneider, MD, Senior Vice President for Policy and Research at the Commonwealth Fund. “It's becoming increasingly difficult to be a small hospital or a small physician practice.”

Consolidation matters, he said, because of antitrust concerns and fears that these mergers will result in less competition and higher premiums, deductibles, and co-pays for patients. So far, announced or proposed mergers of health insurers could result in the big five insurers—UnitedHealth, Anthem, Aetna, Humana, and Cigna—becoming the big three, several speakers noted.

On the plus side, however, larger, integrated provider organizations may provide more coordinated care and can take on more financial risk. They could also take on more market share and gain leverage in their negotiating power, which could be good for patients.

Is Bigger Better?

Bigger may be better in oncology, where a large, consolidated and integrated health system could work to patients' advantage because of a higher volume of cancers seen, said Bruce Vladeck, PhD, now Senior Advisor to Nexera Inc., a consulting subsidiary of the Greater New York Hospital Association, and former administrator of the Health Care Financing Administration (now the Centers for Medicare & Medicaid Services).

He described the case of a relative with a rare cancer who received a misdiagnosis preoperatively. The relative sought a second opinion and received a correct diagnosis at a cancer center that sees a higher volume of similar cases.

“We've known for years that the larger the number of cancers treated, the better the outcome,” Vladeck, a former Presidential appointee to the National Bipartisan Commission on the Future of Medicare, told OT. The same volume/outcomes link is true for cardiac surgery and neonatal care, he noted, adding that consolidation also prevents hospitals from closing due to reduced rates of inpatient use.

Consolidation Stats

According to Alliance data, 2014 brought a “flurry of consolidation” in the health care industry, including the following:

  • There were 1,299 mergers and acquisitions at a value of $387 billion—both figures representing record highs;
  • Health care mergers and acquisitions were up 26 percent from 2013 to 2014, and the value of those deals rose 137 percent. Much of the increase was driven by the pharmaceutical sector, which accounted for 55 percent of spending and 14 percent of deal volume (the 2014 value of pharmaceutical transactions totaled $213 billion);
  • Activity in the health provider area slowed slightly, although the pace picked up toward the end of 2014: For 2014 there were 79 hospital mergers, and 58 physician practice group mergers or purchases;
  • The estimated national market share for the five largest insurers in 2014 was 83 percent, up from 79 percent in 2010 and 74 percent in 2005.

When hospitals merge with other hospitals and provider groups merge with other provider groups, “this sets off alarm bells,” Schneider said. He noted that since 2009 there has been an upward trend of physicians joining large practices (larger than 50 physicians), as well as an upward trend in physician-hospital arrangements.

New Trend, to Guarantee Referrals

According to an Alliance briefing document, there is a new trend in hospital acquisitions: health systems acquiring community hospitals to provide guaranteed referrals.

Schneider posed the following questions:

  • When insurers merge, what happens to premiums?
  • When providers consolidate, what happens to prices?
  • Can provider integration improve quality and reduce costs?
  • If insurers gain market share can they counteract provider price increases?
  • Can they improve the quality of care? and
  • What can policymakers do to promote quality and affordability as providers consolidate and integrate?

The size of physician practices has indeed been increasing over time, to the point where since the year 2000 there has been almost a doubling of physicians in practices of 100 or more, said Laurence Baker, PhD, Professor and Chair of the Department of Health Research and Policy at Stanford University School of Medicine.

“Prices are higher when there's more concentration... consolidation drives higher prices.” He noted that higher practice concentration levels—which can be measured using the Hirschman-Herfindahl Index—are common in oncology and radiation oncology, and are associated with higher prices, and that higher hospital concentration is also associated with higher prices, he said.

“Consolidation in both provider and insurer markets is already extensive, and the trend will continue even without additional mergers,” said Paul B. Ginsburg, PhD, the Norman Topping Chair in Medicine and Public Policy at the University of Southern California, and former Deputy Assistant Director of the Congressional Budget Office and founding executive director of the Physician Payment Review Commission (now the Medicare Payment Advisory Commission).


Ginsburg agreed with Schneider that it is increasingly challenging to be a small hospital or medical practice because of the following factors:

  • Pressure on reimbursement;
  • “New contracting models;
  • Demand for electronic medical records; and
  • Lifestyle choices by younger physicians.

Some physicians are opting to become salaried employees of hospitals, the Alliance briefing document noted, because that's a way to provide payment security at a time of uncertain reimbursement rates, as well as a better work-life balance.

Today's health industry environment also poses challenges for small insurers, Ginsburg said, because: multi-state employers prefer national accounts; larger insurers are able to achieve economies in building analytic capabilities; and small insurers have a limited ability to contract with providers with alternative payment models.

Implications of Networks

On the provider side, there is a trend toward networks, and toward shifting volume from high-priced to low-priced provider networks, Ginsburg said. This strategy offers three potential sources of savings: a higher proportion of care given by lower-priced providers; price reductions from providers to qualify for a narrow network; and a long-term greater effort by providers to reduce costs.

With a provider network, there is the potential for using broader measures of price (such as bundled episodes and capitation) and incorporating quality, he continued. “There is also an opportunity for integration through provider-led plans or joint ventures with insurers.”

In addition, tiered provider networks have potentially larger consumer acceptance than narrow networks do, because they offer patients point-of-service choices.

Narrow networks result in premium reductions of about 15 percent, Ginsburg explained, emphasizing, though, that there is “a need for better transparency about networks,” as well as a need for “getting network adequacy requirements right.”

There must be a balance between cost-saving and consumer protection, he said, adding that there is also a need for “speedy appeals on specialist needs.”

Policy Agenda

In the era of health care consolidation, what is needed is a policy agenda to promote competition, Ginsburg said. He recommended that such an agenda include: vigorous antitrust enforcement, with “more attention to hospital acquisition of medical practices, and issues not involving mergers—for example access to information technology”; support for independent hospitals and medical practices, with a “level playing field on payment”; and “wise policies on network adequacy and insurance exchanges.”

‘ACA Not to Blame’

And while some people blame the Affordable Care Act (ACA) for excessive mergers and consolidation, that is not the case, stressed Thomas Greaney, JD, the Chester A. Myers Professor and Co-Director of the Center for Health Law Studies at Saint Louis University School of Law. “The ACA really depends on and promotes competition,” said Greaney, a former Assistant Chief in the Department of Justice's antitrust division.

The ACA is not responsible for excessive mergers and consolidation, and the ACA has led to insurance exchanges and payment reform, and has been a spur to new health care delivery systems, he said.

Antitrust Merger Law

Greaney said the goal of antitrust merger law is to prevent consolidation that “enables exercise of market power.” In health care, this market power could include coordinated pricing; a situation in which the merging parties exercise power without regard to their rivals; the ability to lower prices paid to doctors and hospitals; and the ability to keep out the potential competition, such as a new insurer.

Economic studies have shown that large insurers do secure larger discounts from health care providers, Greaney continued. But, he said, large insurers do not pass on the cost savings to consumers in reduced premiums. Therefore, dominant providers are a leading cause of high health costs and insurance premiums.

He noted that the Department of Justice has found that new insurers have difficulty getting price discounts from hospitals if they lack a good consumer base, thus creating a barrier to entry into the marketplace.

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