By Joanne Kenen
Hospital consolidations – mergers and acquisitions – are increasing, as this chart illustrates. There have been several hundred hospital deals since 2009, and from 2009-13 one-third of all cases investigated by the FTC were hospital-related.
Is this trend a wise and inevitable path to a more efficient health care system? Can big systems wring out waste and overlap and inefficiencies and better deploy data, telemedicine and EHRs? Or are we just empowering bigger, more powerful hospital systems that will be able to demand higher prices from insurers and other payers as they come to dominate the market?
Barak Richman, Ph.D., a Duke law professor whose doctorate is in business administration, is an expert on (and a worrier about) hospital consolidation. This tip sheet helps explain an area that has an outsize impact on our communities but which we as health journalists may neglect or not understand. This lightly edited email interview with Richman includes information about policy and regulation at the federal and state levels.
How much merger and acquisition activity has there been since the ACA was passed in 2010? Is this more or less than what we’ve seen historically?
There has been a real surge of acquisitions over the past four years, but health care providers have been consolidating rapidly for at least the past 20 years. What is interesting is that this wave has included different kinds of acquisitions and has generated produced different challenges to merger policy.
How are they different?
Until recently, most mergers simply combined two or more hospitals that previously had been competitors. Those kinds of mergers are still happening, but now we’re also seeing “vertical acquisitions,” in which hospitals are combining with outpatient clinics, physician practices, and other facilities in the delivery system. These vertical acquisitions are producing “integrated delivery systems,” which is what providers think they now need.
Is the current wave of mergers because of the ACA — or would it be happening anyway?
The ACA was primarily about reforming our health insurance markets. It did far less to reform our delivery system. But the law does introduce some changes to how we compensate providers. These changes are part of a larger effort to nudge the health sector away from fee-for-service medicine. Thus, providers are now preparing for payments that are less connected to output or volume and more linked to outcomes and value, and that has introduced more urgency for providers to prepare for a different way of doing business. Many think that integrated delivery systems are the best way to prepare for that new payment system. Providers are also trying to prepare for the possibility that payers, including Medicare, will assert themselves more aggressively.
Does creating an Accountable Care Organization usually involve mergers and acquisitions?
Not necessarily. ACOs have assumed all sorts of shapes and sizes but what “accountable care” fundamentally requires is communication networks across multiple providers. Those networks could be formed without merging providers into a single entity. An ACO does not require complete integration.
What do we know about how mergers affect the price of hospital care?
Reducing competition increases price. We know that, and we’ve known that for generations, as a matter of rudimentary economics, across markets of all kinds. What’s remarkable, and unfortunate, is that we have been less demanding of competition in hospital markets. There seems to be a lingering belief that healthcare providers won’t exploit pricing power the same way everyone else does. That belief is thoroughly refuted by research—recent findings indicate that a merger of two hospitals located near each other will increase prices an astounding 40%— but for a long time at least, it led to bad policy.
Do mergers create efficiencies? And does the current ACA landscape, with some changing incentives, likely to change this?
To date, there is very little evidence—I venture to say none—that the mergers over the past 20 years have generated any efficiencies. Hospitals now argue that the current wave of acquisitions reflect a different kind of integration — this time, they tell us, their acquisitionswill generate efficiencies. To be candid, I think there’s something to that argument. One reason is that these vertical mergers might better coordinate care. Another is that providers might pursue efficiencies with greater vigor, given growing financial pressures from payers. I treat these promises with healthy skepticism, but I’m deeply hopeful they’re correct. Nonetheless, there’s no evidence yet, and it’s a bad idea to let them accumulate monopolies while trusting that efficiencies will come later. As a matter of both law and good policy, they need to demonstrate efficiencies before we let them continue with acquisitions that compromise competition.
Are most of the mergers between a for-profit and a nonprofit?
The numbers vary widely, especially considering the different kinds of consolidations taking place. But the distinction between for-profit and nonprofit hospitals should not be emphasized. Abundant research proves that for-profits and nonprofits pursue the same pricing strategies.
There was a spate of consolidations in the 1990s.What caused it then? Why did it taper off?
One reason was that the rise of managed care started placing revenue constraints on providers. You often heard complaints that insurers had all the negotiating power and were demanding lower prices, so the hospitals’ response was to join forces to amass their own negotiating power. (This dance between insurers and providers, where each one accused the other of dominating negotiations, caused many markets to have both highly concentrated provider markets and highly concentrated insurance markets.) Another reason was that policymakers—including courts—failed to realize just how dangerous hospital monopolies are, so little was done to stop the consolidations.
The FTC reviews proposed mergers but few are stopped. Is it being aggressive enough?
The FTC has the capacity to challenge only a few mergers, so they select the ones that most threaten competition. To their enormous credit, they have been aggressive in tone and substance, and they also have been successful recently in court. These successes signal to providers that anti-competitive mergers can and will be challenged. That itself creates an overall effect on merger activity.
The more interesting question is how the FTC should address certain vertical acquisitions and other troublesome conduct by current monopolists. This is important because the current policy challenge is not just how to stop additional mergers, but also how to police the monopolies that past merger waves created. Antitrust law is less suited to deal with these challenges to competition. So it’s not a question of whether the FTC should be more aggressive, but whether they, in conjunction with Congress and the courts, can institute changes to the law that enables policing this category of anticompetitive conduct.
Even if the FTC were empowered to pursue these challenges to competition, it cannot stimulate competition in our health sector by itself. And that’s what we need—not just policies to stop threats to competition, but policies that stimulate more competition. So we need more policymakers—at both the state and federal levels—to devise policies that make healthcare markets more competitive. Because healthcare is a thoroughly regulated sector, many policymakers throughout the government can have a hand in how healthcare markets work.
How much power do states have to regulate consolidation?
In many respects, state policymakers have even more power in shaping these markets. First, state attorneys general can challenge anticompetitive mergers in their states, just like the FTC. And because both insurance and providers are regulated at the state level, state policymakers—insurance commissioners, state licensure bodies, health commissioners, just to name some—have enormous capacity to inject competition into the market. I’d like to see some governors assert leadership in this arena. There is no reason they should wait for federal policymakers to act.
What worries you most?
Inaction, I suppose. The nation’s delivery system is changing before us, and it’s not clear it’s changing for the better. Because these changes involve consolidations of vast entities, most of them are irreversible. If policymakers do little to scrutinize how the market takes shape, then we’d have lost our chance to allow new technologies and new organizational forms to reassess how we deliver care.
We need to remind ourselves that we spend more on healthcare than any other nation, and we exhibit worse outcomes. We have enormous opportunities to allow market forces to inject creativity and innovation into the health sector. Yet that will be extremely difficult if all providers are locked up in large, stagnant systems tethered to a deeply flawed business model.
The FTC is doing what it can to stem these agglomerations, and I’m heartened that it seems the public now recognizes that hospital monopolies pose serious threats to the economy. But a policy that relies only on stemming a merger wave is too little, too late.