Hospital Consolidation: Hospital Consolidation Trend to Continue

The continuing health system consolidation trend is drawing increased scrutiny from researchers and policymakers, but they tend to disagree about how best to respond to it.

Hospital consolidation was the focus of a May roundtable among policymakers and researchers in Washington, D.C., with participants acknowledging that it is an increasing trend. Among the studies cited to support this premise was a May analysis by Kaufman Hall, which found that hospital mergers and acquisitions increased 10 percent in the first quarter of 2014 compared with the same time frame last year. Study findings overall indicated a continuation of several trends, including increasing numbers of acquisitions. Kaufman Hall found that total hospital and health system combinations increased 3 percent in 20i3, to 98 deals.

Also cited was the annual mergers and acquisitions report by Irving Levin Associates, which stated that the number of hospitals and hospital beds involved in hospital deals in 20i3 hit a five-year high, despite a nearly 22 percent decline in the number of transactions, which included the acquisition of Health Management Associates by Community Health Systems and the sale of Vanguard Health Systems to Tenet Healthcare.

Stuart Guterman, vice president of Medicare and cost control for the Commonwealth Fund, noted the adverse effects of consolidation, reflected in the assumption that decreased competition would make it easier for providers to pass along higher prices to patients and payers.

But the lack of clear research evidence makes the full effect of mergers somewhat of a "black box." Guterman noted that research has disclosed positive effects from consolidation as well as potentially adverse market effects. For instance, consolidation can allow for increased collaboration and clinical integration to improve care coordination and clinical outcomes.

To avoid unwanted consequences of consolidation, such as strengthened resistance to payers' demands for lower prices and improved quality, Guterman urged regulators and antitrust enforcers to implement a new competition policy.

"Stop focusing on whether a big hospital or a big insurer dominates a given market," Guterman said. "Rather, look at whether these entities are creating legal barriers to entry."

Paul Ginsberg, PhD, chair of medicine and public policy, University of Southern California, urged regulators to narrow their antitrust focus to hospital acquisitions of and affiliations with physician practices. Those relationships have the greatest potential for "anticompetitive impacts," he said.

Ginsburg also noted the existence of many other opportunities for other market approaches to offset increased hospital consolidation. For instance, he urged public and private payers to back "more effective" accountable care organizations, which would allow physician groups to steer patients to better hospitals.

Regulator's 'Key Goal'

Martin Gaynor, PhD, director of the bureau of economics for the Federal Trade Commission (FTC), said merger benefits may include reducing excess capacity in some communities or improving clinical integration, but so far there is "little evidence that consolidation achieves these goals."

Gaynor cited previous research that found hospital consolidations increased prices by up to 50 percent, and other studies that found more hospital competition was associated with the provision of higher-quality care.

His agency's "key goal" is to allow new market entrants, because "Once competition is gone, it ain't coming back."

"If there are no alternatives, then innovations can't work," Gaynor said about policies aimed at improving competition, such as price transparency.

Despite the stated focus of the FTC, some health policy experts remained uncertain as to why some hospital mergers draw FTC opposition while many others do not.

Gaynor declined to discuss recent instances but said his agency generally allows mergers to go forward if there is no identified harm to competition or there are identified benefits, or no evidence either way.

Although the majority of healthcare markets are "dominated by one or a few health systems," the effect of this dominance on market competition is often benign or neutral.

"We just aim to protect consumers," Gaynor said.

Consolidation Assistance Needed

David T. Vandewater, president and CEO of Ardent Health Services and chair of the Federation of American Hospitals (FAH), urged regulatory restraint toward the hospital consolidation movement. The trend is necessary to meet increasing quality demands of public and private payers as well as continued cuts under Medicare and Medicaid, he said. For instance, $u3 billion in hospital cuts have been approved by Congress since enactment of the Affordable Care Act (ACA), which included another $320 billion in cuts over 10 years.

"We're trying to figure out how to lower the cost of care delivery through consolidation and innovation," Vandewater said.

Consolidation also aims to offset the effects of insurance trends such as the shifting of more of the cost of care onto policyholders. The fastestgrowing portion of uncompensated care in Vandewater's system, for instance, has occurred in patients' co-pays and deductibles.

"I have to take on bad debt associated with these high-deductible health plans," Vandewater said.

An FAH-commissioned report by the Center for Healthcare Economics and Policy assessed 75 studies and 36 primary sources spanning the past 15 years and found the vast majority of mergers did not impede market competition, but rather created more competitive healthcare markets. Researchers also found no statistical correlation between realignment and pricing.

"The focus of my involvement in mergers and acquisitions has always been about reducing redundancy and increasing patient access," Vandewater said.

Counterintuitive Price Trend

Meanwhile, Bruce Vladeck, PhD, senior adviser for Nexera and a former administrator of the precursor agency to the Centers for Medicare & Medicaid Services (CMS), has found that hospital prices, which had been rising for many years far faster than inflation, have been fairly flat over about the past 24 months. The reasons for the price stabilization remain unclear.

"Thus, there appears to be a contradiction between efforts to contain healthcare prices and the fact that aggressive policies aimed at reducing provider concentration might be ineffective and could even have the unintended effect of stunting positive developments," Vladeck wrote in Health Affairs ("Paradigm Lost: Provider Concentration and the Failure Of Market Theory," May 2014).

Such conflicting trends are among the reasons that Robert Berenson, MD, a fellow at the Urban Institute, favors a new regulatory approach. He urged ceilings on permissible negotiated rates, targeting particular institutions for oversight, and implementing a range of "pro-competition" regulatory provisions-for example, prohibiting anti-competitive terms and conditions in insurer-provider contracts.

Berenson is co-chair of a National Academy of Social Insurance study panel that aims to catalogue the full range of policy options available to address pricing power. The panel's report is due this fall.

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Rich Daly is a senior writer/editor in HFMA's Washington, D.C., office. Follow Rich on Twitter: <3>rdalyhealthcare.