Why Too Many Mergers Are A Bad Thing
Purchasers of healthcare, long-time supporters of organized systems of care, are watching with growing alarm as horizontal and vertical mergers between providers accelerate. Buyers with experience in other sectors understand that consolidation can improve efficiency, quality, and the generation of capital, especially where there is excess capacity and abundant waste. They are equally aware, however, that over-consolidation can lead to pricing power, the absence of competition, and the crowding out of disruptive innovations.
Catalyst for Payment Reform, a non-profit working on behalf of large employers and public health care purchasers to improve the quality and affordability of health care through payment innovation, convened a national summit on provider market power earlier this month in Washington.
There, the nation’s leading experts discussed and debated how to maintain enough competition among healthcare providers to stimulate improvements in the delivery and affordability of care.
Participating experts stated that by as early as 2006, over 75% of U.S. metropolitan statistical areas (MSAs) had experienced enough hospital mergers to be considered ‘highly consolidated’ – a trend that continues. Economists agreed that the evidence demonstrates that highly-consolidated providers can raise prices considerably. Provider leaders offered their views on why consolidation is occurring, including to meet the demands for integration and efficiency, to counterbalance a highly-consolidated health insurance market, and to have enough income to invest in IT systems and other infrastructure necessary for population management.
Employers made the point that while experts argue about over-consolidation versus integration, an irreversible “cycle of consolidation” exists in some markets that may be impossible to undo; as doctors and hospitals form larger organizations and federal and state budget pressures continue to constrain Medicare and other public program payments, providers will use their increased market power to demand large price increases from health insurers and employers.
With limited competition in local markets, employers will have no choice but to absorb these increases and pass them on to employees. Due to the unique nature of provider organizations, frequently the largest and most admired employers in their communities, political and social forces will attenuate vigorous anti-trust action and leave limited ability to break-up these dominant entities.
In addition it is possible that newer proposed mergers, which could enhance competition, will be challenged, inadvertently cementing the status quo. The upshot of this cycle will be health organizations that are “too big to fail,” resulting in less affordable care. The recent piece in Health Affairs that questioned whether cost shifting actually occurs in the wake of lower Medicare payments doesn’t alter the fact that dominant organizations have the power to raise prices.
The summit made it clear that different stakeholders view the issue of provider market power differently. But a handful of conclusions came out of the summit that most would likely support.
First, data are not yet definitive about whether we are witnessing integration or over-consolidation. All parties agreed that we need pro-active, independent monitoring and evaluation.
Second, most parties agreed that action needs to be taken in the short term to enhance competition. Public and private sector leaders alike should continue what is now a national movement to advance price transparency. A 2010 study by the Center for Studying Health System Change for CPR, and CMS’ recent release of hospital charge data together show striking variation in both what providers charge and ultimately get paid. Many argue these differences reflect some providers’ ability to charge higher than competitive prices. For this information to be useful to consumers we need to translate it into what they will actually pay and combine it with salient quality information.
Third, payers need to design benefits and service offerings that create incentives for consumers to shop based on value. Although consumerism is by no means the sole answer to driving value, it is an important tool. For example, CalPERS, California’s public employee retiree system, has already succeeded in bringing down its spending on hip and knee replacement surgeries by 30 percent by using reference pricing. CalPERS members can still get high quality surgery, but at facilities that charge a reasonable price.
Ultimately, we need new approaches on the payer side, more public and private sector coordination and potentially even regulation, to ensure that the unprecedented transformation of the delivery system results in the positive potential of integration rather than the negative consequences of over-consolidation.
Robert S. Galvin, M.D. is the chief executive officer of Equity Healthcare, which oversees the management of healthcare for firms owned by private equity companies. This op-ed originally appeared at the Healthcare Blog.
