Senate Budget Committee Issues Testimony From Harvard Business School, Harvard Kennedy School Professor
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I. High and rising provider prices are driving higher health care spending
The
Figure 2 depicts where we spend our health care dollars. My focus today is health care providers, such as hospitals, physicians, and clinics, who jointly account for just over half of health care spending. Whereas public insurance programs set the prices they pay to health care providers, commercial insurance plans negotiate rates with providers who are then included "in network"; covered services performed by in-network providers are accessible to enrollees at much lower out-of-pocket cost than services provided by out-of-network providers. The growth in health care spending for the commercially insured population is largely due to growth in these negotiated rates, also called "commercial prices."2
Commercial prices are much higher than prices for publicly-insured patients,3,4 and the gap is widening. Commercial prices were around 10 percent higher than Medicare in the late 90s, but...
1 Anderson, GF et al. "It's still the prices, stupid: why the US spends so much on health care, and a tribute to
2
3
4 Cooper et al. (2019), supra note 2. Private insurers administer benefits for a large portion of Medicare and Medicaid-insured beneficiaries, and for these enrollees, insurers and providers must agree to the terms, including price, under which a provider is included in-network. However, for Medicare Advantage plans, CMS requires providers that participate in Traditional Medicare to accept its fee-for-service price schedule for any out-of-network care, reducing the ability of most providers to negotiate for Medicare Advantage rates that are much higher. See...
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...by 2012 were 76 percent higher and are even higher today.5 A recent (2020) study found that average commercial prices for inpatient and outpatient services were double Medicare reimbursement rates, while prices for professional services - e.g., physician services rendered with hospital-based care - were 60 percent larger.6
While public insurance programs do not pay these commercial prices, there are significant federal budgetary implications of high commercial prices. Most directly, high commercial prices mean high employer-sponsored premiums, raising the cost of the tax exclusion for employersponsored coverage. High commercial prices also impact the premiums, and therefore the federal subsidy dollars, for enrollees purchasing subsidized plans through the Health Insurance Marketplaces. There are important indirect effects as well. The organizational structure and market concentration within the health care industry, which serves enrollees of all insurance programs, is heavily influenced by commercial prices and vice versa. These factors affect the quality and quantity of care provided to publicly-insured enrollees, as well as the site where that care is delivered - which directly affects the price the federal government pays.
Providers defend their negotiation of higher commercial rates by saying they must cover the costs of government-insured and uninsured patients, for whom care is reimbursed at rates below their actual costs. This dynamic ignores the fact that costs are themselves affected by reimbursement: economic research finds that hospital expenses fall when prices fall.7 In other countries, this type of gap does not exist or is smaller, and cross-subsidization reduces pressures on providers to pursue efficiencies. If it is possible to negotiate higher commercial rates, that is an easier path than redesigning care to reduce costs and overall spending. It is also essential for payers, both public and private, to support providers in this work - for example through reimbursement arrangements that allow funding for case management that prevents costly care.
...
5 Selden TM, Karaca Z, Keenan P, White C, Kronick R. "The growing difference between public and private payment rates for inpatient hospital care," Health Affairs 2021 Dec; 34(12): 2147-50.
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7 White C, Wu VY. "How do hospitals cope with sustained slow growth in Medicare prices?" Health
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II. Consolidation within and across health care subsectors is a key driver of higher prices and total costs of care
Increases in commercial prices have coincided with massive consolidation within and across health care provider sectors. There were nearly 1,600 hospital and hospital system mergers over the 20 years from 1997 to 2017, involving thousands of hospitals. This merger and acquisition activity has increased the absolute size and geographic footprint of hospital and health care delivery systems - and with it, their market power and political heft.8 Merger and acquisition activity in physician markets has also increased, and the share of physicians employed in practices wholly or partly owned by hospitals has increased from below 20% in the mid-2000s, to 30% in 2012 and 50% in 2018.9,10
Given that consolidation has coincided with substantial growth in commercial prices and spending, the question of whether consolidation has caused these increases has attracted significant attention from researchers as well as various stakeholders. To date, the most conclusive research derives from analyses of "structural changes" in markets--i.e., mergers and acquisitions, divestitures, and exits. I summarize the results of these studies below. However, it is important to recognize that a good deal of consolidation to date is non-structural, that is, it results from the swift growth of large firms.
Some of the large-firm growth may well be due to anticompetitive conduct (in addition to mergers and acquisitions). For example, some dominant hospital systems' contracts forbid insurers from using financial incentives to "steer" patients to other (typically smaller and less expensive) providers11 and/or may prohibit insurers from contracting with only a subset of the...
8 Hospital merger count is based on data from the
9
10 Commercial health insurance markets have grown increasingly consolidated as well. By 2021, 75 percent of metropolitan areas were "highly concentrated" as defined in the
11 Hospital systems that know they are indispensable in their markets sometimes agree to participate in insurance products in which there are no out-of-pocket differences among providers, but refuse to participate in products in...
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...dominant system's providers (e.g., blocking an insurer from including just some of the system's specialists in-network).12 Such "all or nothing" contracting can enable a system to allocate services efficiently across different facilities, but it can also be a means for a system with market power to potentially expand its reach by "tying" access to its providers in more competitive markets to access to its most highly-valued providers.13
Below, I provide a brief summary of the empirical evidence on the effects of provider consolidation.14 I emphasize studies published in peer-reviewed, academic journals.
A. Expansion of hospital systems within and across geographic areas increases prices Hospitals account for over 30 percent of
Researchers have studied the effects of hospital mergers for several decades now, and there is substantial, robust evidence showing that hospital mergers, on average, lead to higher commercial prices.17 This research, which has focused on mergers among hospitals serving patients in the same geographic area, finds that combinations of close rivals yield the largest price effects.18 Joining forces with a competitor enables the merged system to negotiate a higher price with insurers, who can no longer turn to the competitor if they fail to agree on price with...
...which there are "tiers" with different co-payments, based upon the prices of the providers. These conditions can render tiered products unviable in that market.
12 See, e.g.,
13 That is, under an all-or-none contract, the dominant system requires insurers, as a condition of contracting with its most highly-valued hospitals and medical groups, to also contract with the system's less highly-valued providers (even of the price and quality of those providers are such that the insurer would otherwise choose not to contract with them).
14 For more comprehensive summaries, see RAND: Liu et al., 2022.
15 Figures from
16 Fulton et al.,"The Rise of
17 For additional discussion and study citatons, see
18 For a recent example, see Brand et al, "In the Shadow of Antitrust Enforcement: Price Effects of Hospital Mergers from 2009-2016,"
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...one of the hospitals. Studies also find that in markets that are more consolidated, price levels are higher and price growth is steeper.19
While most research on the impact of hospital consolidation focuses on "within market" or horizontal mergers, recent studies have evaluated the effects of so-called "cross market" hospital mergers, or combinations occurring among hospitals in different, sometimes adjacent, geographic markets.20 This research shows that acquisitions of hospitals, even by hospital systems without a local presence, often leads to substantial price increases both for acquired hospitals and for acquiring hospitals located in the same state.
Importantly, numerous studies fail to find systematic evidence of benefits to consumers from mergers in terms of clinical outcomes or patient experience, and many studies link more hospital competition to higher quality.21 While some research finds evidence of modest cost savings from hospital consolidation - specifically mergers of hospitals in different geographic areas - the substantial body of evidence that prices increase on average after hospital mergers implies that such savings are typically not sufficiently large or not "passed through" via lower prices.22 To sum it up: due to consolidation we are paying more for our hospital care, and there is no evidence that we are getting more in return.
Researchers have also found evidence that hospitals in more concentrated markets are less likely to receive fixed, prospective payments - a payment methodology that creates incentives for providers to control costs - and more likely to receive payments linked to billed charges.23 This pattern shows that hospitals with market power are better-positioned to reject cost-containing payment innovations by insurers.
19 For a summary, see
20 L. Dafny,
21 E.g.,
22 Schmitt, Matt, "Do Hospital Mergers Reduce Costs?"
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Researchers have also examined the effects of consolidation on health care workers. These studies find that wage growth for health care workers declines in the wake of hospital and insurer mergers that result in large increases in market concentration.24 The economics underlying these findings is straightforward: just as market power enables suppliers to charge more for their output (i.e., health care services or insurance plans), it also enables them to pay less to employees, particularly those with industry-specific skills.25 The wage growth slowdowns attributable to hospital mergers are attenuated in markets with stronger labor unions. Health care worker unions have garnered national attention in recent months, owing to the strike by 75,000 employees of
To the extent that hospital consolidation leads to lower wages and poorer terms of employment, it will exacerbate burnout among health workers, an issue of growing concern for our nation.26
B. Consolidation of physicians also leads to higher prices and spending
Physician markets have also experienced extensive consolidation in recent years. Figure 3 depicts the number of publicly announced physician mergers and acquisitions between 2012 and 2022. Perhaps the most significant phenomenon affecting physician markets in the past decade has been the acquisition of physician practices by hospitals. The
Research on physician mergers and consolidation mirrors the findings from the hospital consolidation literature, although the body of research is smaller. Physician prices are higher in...
24
25 Prager and Schmitt find the effects of mergers on wage growth are stronger among those with industry-specific skills, such as nursing and pharmacy workers. Consistent with economic theory, they find no effect of mergers on wage growth among unspecialized workers whose roles are not unique to the hospital setting, such as cafeteria workers. They are unable to examine physician incomes using their data sources.
26 See, for example, "Addressing Health Worker Burnout: The
27 A study (https://www.physiciansadvocacyinstitute.org/Portals/0/assets/docs/PAI-Research/PAI%20Avalere%20Physician%20Employment%20Trends%20Study%202019-21%20Final.pdf?ver=ksWkgjKXB_yZfImFdXlvGg%3d%3d) commissioned by the
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...more concentrated physician markets.28 There is evidence that physician prices increase following mergers in the same specialty and geographic area, and when generalists are integrated with specialists in the same organization.29 In addition, many studies find higher prices and spending following hospital acquisition of physician practices. For example, one study based on detailed commercial claims data finds average price increases of 14 percent.30 Importantly, these affiliations are associated not only with price increases but also with a shift of patients toward higher-priced hospitals and higher-priced services - yielding an increase in spending even if prices were held constant.31 A study published just last month found that when primary care physicians are part of large health care systems, patients have more specialist visits and higher total spending; more care is also provided within the integrated system, yet the authors found no change in readmission rates.32
Evidence of improvements in patient outcomes with physician consolidation is elusive. One recent study finds only negligible effects of vertical integration of hospitals and physicians on a set of health outcome measures.33 Other research likewise finds either no relationship or a positive but small relationship between vertical integration of hospitals with physicians and measures of quality.34 One recent working paper finds the recent increase in integration of gastroenterologists with hospitals has led to significant changes in care processes - including...
28 A. Dunn and A. Shapiro, "
29
30
31
32 A. Sinaiko et al, "Utilization, Steering, and Spending in Vertical Relationships Between Physicians and Health Systems.
33
34
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...greater use of anesthesia with deep sedation - and a substantial increase in post-procedure complications and spending.35
A number of studies have shown that Medicare's preferential reimbursement for services delivered in hospital-owned sites is a key driver of physician-hospital integration.36 One study attributes a sizeable share of the overall increase in hospital employment of physicians between 2009 and 2013 to a change in Medicare reimbursements in 2010 that led to a further relative increase in payments for services performed in hospital-owned sites, observing that "organizational structure responds to profit incentives."37
As private-equity firms acquire more physician practices, research on the prevalence and repercussions of these transactions is growing. Private-equity firms typically acquire multiple practices over time, and often amass significant market share within certain specialties and geographic areas. Once they acquire practices, they tend to increase volume and spending by insurers. For example, one recent study of 578 dermatology, gastroenterology, and ophthalmology physician practices that had been acquired by private equity companies found an 11 percent increase in price per claim, as well as a 38 percent increase in visits by new patients, as compared to 2,874 similar independent practices.38 Another study found statistically significant commercial price increases following private-equity acquisitions in 8 of 10 specialties studied.39 A study of the effect of private-equity acquisition of ophthalmology practices on Medicare enrollees finds an increase of 22 percent in the use of higher-cost treatments.40
Recently, the
35 Saghafian et al, "The Impact of Vertical Integration on Physician Behavior and Healthcare Delivery: Evidence from Gastroenterology Practices,"
36 For example, in 2019 the payment rates for a midlevel (Level 4) office visit for an established patient were
37 Dranove and Ody, 2019, ibid. Note that hospital-affiliated physicians do not need to treat patients in a hospital outpatient department in order to bill a "facility fee."
38 Singh Y, Song Z, Polsky D, Bruch JD, Zhu JM. "Association of Private Equity Acquisition of Physician Practices With Changes in Health Care Spending and Utilization,"
39 Private-equity investments are common in other healthcare sectors as well, including hospitals and nursing homes. For an overview see "The Growth of Private Equity in US Health Care: Impact and Outlook," NIHCM Expert Voices Brief,
40
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...resulted in growing monopoly power and prices "double the median rate of other anesthesia providers in
C. Consolidation in other provider sectors is also linked to higher prices and lower quality
In the interest of brevity, my testimony focuses on the two largest and best-studied provider sectors: hospitals and physicians. However, there are studies of provider consolidation in other subsectors, and many studies of which I am aware echo the results obtained in the hospital and physician consolidation. These include studies of kidney dialysis centers and nursing homes.42
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As I highlight below, studies such as those described in the sections above are increasingly difficult to perform, as researchers have limited and expensive access to data - particularly commercial claims data. These studies are critical for understanding the drivers of price and spending growth for commercial and public insurers alike, and for illuminating important changes or stasis in modes of health care delivery and outcomes.
III. Federal antitrust enforcement requires more resources and legislative support to have greater impact
Americans rely on the federal antitrust enforcement agencies to enforce our competition laws, which prohibit both anticompetitive conduct and mergers. This is not the setting for a comprehensive discussion of
41 "FTC Challenges Private Equity Firm's Scheme to
42 "How Acquisitions Affect Firm Behavior and Performance: Evidence from the Dialysis Industry," with
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There are many reasons for the rise of consolidation in health care provider sectors in spite of antitrust enforcement, including
* Limited visibility and timeframe to investigate smaller proposed mergers and acquisitions because federal pre-merger reporting is required only for transactions that exceed high dollar and party size thresholds, and many provider merger fall beneath these thresholds. Even if the agencies become aware of so-called "non-reportable" transactions, the parties may legally merge before an Agency has reviewed the transaction. Unwinding consummated transactions is notoriously difficult, reducing the odds of a resolution that restores competition.
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* Stagnating budgets for the Agencies despite a growing and consolidating economy, more and larger transactions, and an increase in resources required to investigate or challenge them.
In light of stagnating budgets, the Agencies have devoted an increasing share of their resources to preventing further structural consolidation, leaving ever limited resources to investigate and challenge anticompetitive conduct. 44 Some current examples in health care include "all or none" and "anti-steering" clauses in contracts demanded by dominant provider organizations, efforts by such organizations to impede patients' access to unaffiliated, lower-cost providers of some services, and referral of profitable patients to within-system providers and unprofitable patients elsewhere.45
43 For additional discussion of potential changes to the antitrust statutes which would facilitate vigorous enforcement, see L. Dafny, "How Health Care Consolidation Is Contributing to Higher Prices and Spending, and Reforms That Could Bolster Antitrust Enforcement and Preserve and
44 The antitrust agencies can and have investigated conduct by dominant actors in the health care system that may lessen competition. For example,
45 See, for example, Cutler et al, "Vertical Integration of
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Even if antitrust enforcement is reinvigorated and proves successful, it will be insufficient to address the harmful consequences of consolidation that has already taken place, or to address the lack of competition inherent in some markets that are too small to support multiple competing providers. For these reasons, I am among the set of health care economists calling for some form of price regulation, specifically caps on the highest commercial prices.46 There are a number of ways to implement such caps, which could be applied to bind prospectively, could apply to either or both in-network and out-of-network providers, and could be based on commercial or Medicare rates.47 Price caps can also be complemented with restrictions on the rate of price growth permitted for providers of varying price levels, and flexible oversight to address evasion.
It will be most feasible for states to experiment with such caps or limits on price growth, and some are already taking steps toward doing so.48 However, any such efforts will be significantly hampered without access to data about the prices actually being paid for commercial services as well as the quantity and nature of services being delivered. This is infeasible without action by federal legislators to facilitate the creation of an All Payer Claims Database, as I discuss next.
IV. Recommendations
1. Establish and fund an All Payer Claims Database (APCD).
A national APCD will enable regulators and researchers to track and analyze the effects of consolidation. This database would contain health care claims submitted by self-insured group health plans, federal insurance programs, and fully insured individual and group health plans. States cannot achieve this goal without federal intervention owing to the fact that selfinsured plans are regulated under the federal ERISA statute, and a 2016 Supreme Court decision barred states from requiring self-insured plans to supply insurance claims to a state APCD.49 While some states that had already built APCDs before the decision continued to...
46 For details, see
47 For a review of alternative proposals to address prices, including price regulation, see "Policy Approaches to Reduce What Commercial Insurers Pay for Hospitals' and Physicians' Services," Congressional Budget Office Report,
48 For a survey of healthcare antitrust enforcement and regulation by states, see
49 The case is Gobeille v.
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...operate them, and others are underway, without data from self-insured plans it is impossible for states to obtain a comprehensive assessment of utilization, spending, and prices. In addition, developing and maintaining APCDs on a state-by-state basis is expensive and duplicative, requiring each state to establish data standards and an infrastructure.50 Finally, access to APCDs by researchers and regulators has been limited to date; legislation to develop and govern a national APCD could facilitate such access and speed the ability of researchers, regulators, and policymakers to use the data to develop actionable insights. The APCD would also be of great value to states in implementing surprise billing reforms.
2. Increase funding for federal antitrust enforcement agencies.
Notwithstanding substantial economic growth and an increase both in reported transactions and in the degree of consolidation across a range of industries - heightening the need for merger reviews as well as non-merger or "conduct" investigations - funding for the antitrust enforcement activities of the
Approximately half of enforcement actions by the
50 As of 2021, 18 states had legislation mandating the creation and use of APCDs or were establishing an APCD, and others were in various stages of development, per the
51 Growth in real GDP calculated using seasonally adjusted data for calendar years 2000 and 2022, reported by the
52 "
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3. Support "site-neutral" payment reform for Medicare
Higher Medicare reimbursement for hospital-affiliated services has led to an increase in hospital-physician integration, which in turn drives greater utilization of hospital-affiliated services, higher commercial prices, and higher total spending by all payers. Given that Medicare's payment structure is often mimicked by private insurers, inaction by the federal government is exacerbating a situation that drives higher spending and greater expansion by hospitals.
The
53 June 2023 Report to the
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Figure 1. International Medical Prices for Selected Services as a Percentage of
Figure 2.
Figure 3. Physician Group Mergers and Acquisitions by Month, 2012-2022
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View original text, plus charts here: https://www.budget.senate.gov/imo/media/doc/101823_drdafnytestimony.pdf
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