The Impact of Healthcare Consolidation

John McCracken, PhD

The healthcare industry has been consolidating for the past two decades, with hospitals merging into larger systems, physicians consolidating into larger practices and hospitals acquiring physician practices.  The industry has consistently claimed that consolidation benefits consumers with lower prices and better care coordination, but the evidence shows the opposite has been true. 

Healthcare mergers and acquisitions have received nearly universal approval from antitrust agencies, with the Federal Trade Commission and state officials moving to block only a small fraction of the deals.  Because these consolidations have seldom been challenged or broken up, concentration of market power has steadily ratcheted up over time.  In 2016, the Federal Trade Commission characterized almost 90% of all metropolitan healthcare markets, containing over 80% of the US population, as highly concentrated

In 2017 healthcare organizations announced 115 merger and acquisition transactions totaling over $175 billion, the highest number in recent history, and 2019 likely will turn out to be even higher.  Megasystem mergers like Dignity and Catholic Health, Advocate and Aurora, and Ascension and Presence are behind much of this growth, as major systems merge statewide and across state lines.  Once a system has obtained a dominant position in a market, it often does everything it can to maintain it. 

Moreover, market dynamics and technological changes are setting the stage for what may be a future of even more rapid system consolidation.  In a recent study, Deloitte Consulting predicted that as a result of ongoing consolidation, only approximately 50% of the nation’s current 1800 unique health systems likely will remain by 2025. 

Healthcare providers have argued that by taking advantage of economies of scale, consolidation will reduce costs, improve care coordination, increase efficiency and enhance patient access.  On the other hand, consolidation can also reduce competition and enhance market power, leading to increased prices.  The latter is what has actually occurred. 

There are many studies of the effect of hospital mergers, and they generally find resultant price increases on the order of 20% – 30% to be common.  Overall, these studies show that the primary effect of consolidation between market competitors is to increase prices, and by substantial amounts as market concentration rises.  There has also been significant merger activity by hospitals in separate markets that are not direct competitors.  The evidence shows that these also lead to price increases as the merged systems use their enlarged networks to increase their bargaining power with employers. 

The research also shows that hospitals in highly concentrated markets also have more contracts paid as a share of billed charges rather than prospectively paid, e.g., DRGs.  When prices are paid as a share of charges, it transfers greater risk to payers and offers hospitals a weaker incentive to lower costs.  It also strengthens the hospitals’ hand in resisting payment reform.

The market for physician services has also become more concentrated as physician practices either consolidate into larger practices or opt for hospital employment.  A recent study found 65% of major metropolitan areas were highly concentrated for specialist physicians, and almost 40% for primary care services. 

Physician prices charged to commercial insurers are higher in markets marked by high consolidation, while vertical physician-hospital consolidation increases both commercial and Medicare prices.  Medicare costs increase as the program pays both a physician fee and a hospital facility fee for an office visit that would only have been paid a physician fee if the visit had been provided in a freestanding physician office.  

While it is plausible to argue that provider consolidation could reduce costs and enhance efficiency, it is important to recognize that consolidation is not integration.   Acquiring another provider changes ownership, but it does nothing to achieve integration. Integration, if it happens at all, is a long process that occurs long after acquisition. 

Healthcare is a large and expensive industry, in 2018 accounting for an estimated $3.68 trillion, more than the total GDP of all but three other nations of the world.  Hospital and physician services are a large part of the industry, collectively accounting for approximately 9.4% of GDP.  In addition to contributing to an increasingly unsustainable level of healthcare spending, growing provider concentration also increases the gap between Medicare and commercial rates, which contributes to greater private sector cost shifting and puts pressure on Medicare beneficiaries’ access to care. 

Because hospital and many physician markets are already consolidated, the question is not one of preventing consolidation but of how to deal with markets that are already consolidated.  An approach that is likely to come to the fore in the run-up to next election is some form of Medicare buy-in or public insurance plan option, for which provider reimbursement would be based on Medicare rates and total spending controlled by global budgets.  This would pit an irresistible force (commercial and government payers) against an immovable object (the healthcare industry).  Up to now, the immovable object has prevailed, but come the next recession or financial crisis, that could well change. 

John McCracken is Director of the Alliance for Physician Leadership, an educational partnership between the University of Texas at Dallas and The University of Texas Southwestern Medical Center which offers an MS/MBA program in healthcare leadership and management exclusively for physicians.