A quick intro note—I’m hosting what I hope is the first of many Clubhouse conversations on this upcoming Monday evening, March 1st, at 9pm ET/6pm PT. It will be with Soleil Shah, the co-author of one of the JAMA articles I talk about below. The idea is to have it be as close to a conversation (as opposed to a panel) as possible. Join us!
A lot has changed in hospital consolidation discourse in 10 years. In 2009 and 2010, as the framers of the Affordable Care Act were hammering out details, they took it for granted that more consolidation of hospital systems was a good thing. In a 2010 Annals of Internal Medicine piece, three key ACA thinkers—Dr. Bob Kocher, Dr. Zeke Emanuel, and Nancy Ann DeParle, JD—wrote glowingly that the ACA would “unleash forces that favor integration across the continuum of care.”
The ACA did encourage greater consolidation. But health care didn’t get better. The promised upsides of hospital consolidation—greater efficiency, better patient outcomes, improved data-sharing—didn’t materialize. And in 2016, Dr. Bob Kocher, one of the authors of that Annals piece and co-author of one of the JAMA articles discussed below, authored an opinion in the Wall Street Journal about how the 2010 assumptions had fallen short. Here’s a longer quote from the op-ed, because I think it’s helpful in framing the following parts of the newsletter (emphasis mine):
What I got wrong about ObamaCare was how the change in the delivery of health care would, and should, happen. I believed then that the consolidation of doctors into larger physician groups was inevitable and desirable under the ACA. I joined my White House health-care colleagues— Ezekiel Emanuel and Nancy-Ann DeParle —in writing a medical journal article arguing that “these reforms will unleash forces that favor integration across the continuum of care.” We added that “only hospitals or health plans can afford to make the necessary investments” needed to provide the care we will need in a post-ACA world.
Well, the consolidation we predicted has happened: Last year saw 112 hospital mergers (up 18% from 2014). Now I think we were wrong to favor it.
I still believe that organizing medicine into networks that can share information, coordinate care for patients and manage risk is critical for delivering higher-quality care, generating cost savings and improving the experience for patients. What I know now, though, is that having every provider in health care “owned” by a single organization is more likely to be a barrier to better care.
(I, and other members of my org, wrote more about the effect of the Obama administration on health care consolidation and other industries in a huge report published in January)
Horizontal consolidation occurs when hospitals acquire other hospitals.
More than 450 of these mergers occurred between 2013 and 2017, and an additional 90 were announced in 2018. Since then, the sheer number of mergers has declined, but the transactions have gotten larger, according to a Kaufman Hall report about the rise of “megamergers.” By 2016, 90% of Metropolitan Statistical Areas (MSAs) were highly concentrated.
Meanwhile, health care costs keep going up. Despite the much-touted potential for merging hospitals to increase their bargaining power and thus win concessions from (consolidated) group purchasing organizations, research from 2018 found that merger target hospitals save only 1.5% on supplies annually following an acquisition (the authors find mixed evidence for savings by acquiring hospitals).
Efficiency gains, even when they occur, don’t seem to be passed along to patients. A lit review by the Robert Wood Johnson Foundation in 2012 found that the impact of price increases following hospital mergers in concentrated markets is “typically quite large, most exceeding 20 percent.” The data on quality of care following mergers is mixed (see here, especially page 13, for more), but there is certainly no strong evidence that larger hospital systems provide better care.
And now, consolidated hospitals have become so powerful that they impinge on data-sharing and other forms of innovation in health care that could potentially lead to improved patient outcomes.
Note, for example, this succinct concern from an executive at Firefly Health:
As I wrote last week, hospitals are increasingly buying up non-hospital entities, expanding their influence into the provider and ASC spaces. This is a form of vertical consolidation.
This consolidation strategy is allowing hospitals to create true “health systems,” vertically integrated behemoths offering insurance, pharmacy services, outpatient providers, and ambulatory surgery. But even as systems get more powerful—and begin to seriously challenge the ability of state governments to regulate them—the upside for patients has yet to appear.
The effects of a vertically integrated health system are especially pronounced when that system dominates a state or locality. UPMC in western Pennsylvania is a good example of this. If you live in rural western Pennsylvania, where I grew up, UPMC is essentially the only option for any kind of care. That means they can set the terms—and prices—however they want.
New strategies around consolidation
Fears about hospital consolidation are finally hitting the mainstream (of health policy thought), an outcome I welcome with much excitement. There are two excellent new articles in the Journal of the American Medical Association on hospital consolidation, both of which came out this year.
The first, written by Dr. Leemore Dafny, a health economist, talks about specific federal policy changes that would make a real difference in addressing hospital consolidation. She suggests:
Increasing funding to the Federal Trade Commission and the Department of Justice (which has an antitrust division).
Updating the FTC and DOJ’s Statements of Antitrust Enforcement Policy in Health Care, an outdated document that doesn’t take into account how hospital mergers (and other types of consolidation) are happening now, in the 2020s.
Forming a Health Care Competition Task Force to promote interagency cooperation on potential anticompetitive actions; for example, HHS could work with the FTC to deny Medicare funding to entities behaving anticompetitively.
The second article, written by Dr. Bob Kocher, Dr. Amol Navanthe, and soon-to-be-doctor (and friend of mine!) Soleil Shah, focuses on broader policy changes. The key policy change they identify is changing the definition of a hospital referral region (HRR).
HRRs, originally constructed using 1990s Medicare data and intended for research purposes, are now frequently used by lawyers in an antitrust context to determine the competitiveness of regional hospital markets. But HRRs are a nonspecific and overly broad metric for determining which patients have true access to care at which hospitals.
As the authors point out, for example, the New York City HRR includes all of the city’s boroughs except for the Bronx, even though patients in Manhattan are unlikely to travel to Queens for their care. Using overly broad HRRs artificially inflates the number of hospitals to which patients have true access, therefore making the market seem more competitive than it is.
In addition to changing the catchment region for HRRs, Kocher, Shah, and Navanthe recommend creating a public warning label for overly powerful, market-dominant hospitals (MDHs). The authors also propose that the warning label come with additional requirements, like demanding overly powerful hospitals invest a fixed percentage of total revenue into health care provision for marginalized communities.
To prevent vertical consolidation, the authors also propose redistributing revenue from MDH hospitals to independent providers as loans or grants.
The idea of a warning label would be helpful in at least one other context: on a recent episode of the Tradeoffs podcast, host Dan Gorenstein talked about the challenges of large employers negotiating with increasingly powerful hospital systems. Oftentimes, state-based employers have no idea how much their costs are relative to other hospital systems and other states.
In one case described in the episode, large employers based in Indiana pushed for their insurer, Anthem, to negotiate harder with Parkview Health, which a recent RAND study had shown was one of the most expensive hospitals in the country. But without the RAND study, employers would have had no idea that Anthem was overpaying (and passing those costs along to them and their employees).
If, instead of relying on a large, slow-moving academic study, employers had access to the kind of warning label described in Kocher, Shah, and Navanthe’s paper, it would help level the playing field and make it easier for large employers and unions to negotiate.
As the public narrative around hospital consolidation shifts, so does the conversation happening among lawmakers and regulators. There has been increased interest in passing some kind of legislation to halt hospital mergers, both from a state and federal level. A few examples:
In 2019, FTC Commissioner (and current acting Chair) Rebecca Kelly Slaughter called on Congress and state governments to do more to preserve health care market competition, noting that the FTC does not have authority over anticompetitive actions pursued by nonprofit entities (i.e. nearly half of American hospitals).1
That same year, Congressman Jim Banks (R-IN) introduced a bill that would require hospitals in areas with a consolidated market to charge Medicare prices to private insurers.
In late 2019, Washington State passed a law requiring merging health systems to report the merger to the state attorney general.
In 2020, California tried to pass a similar law as Washington’s, although the bill ultimately failed.
Hospitals aren’t alone in their strategy of consolidation; the U.S. is facing increasingly monolithic insurers, pharmacies, group purchasing organizations, and physician groups. This industry-wide arms race, though, has significant consequences for patients and the future of health care innovation. I’m excited to see people talking about it.
The FTC can review mergers between nonprofit entities, including hospitals, but not anticompetitive actions outside of mergers. But because many hospital mergers are too small to meet the FTC’s mandatory reporting requirements, hospital mergers often pass under the FTC’s radar. And again, once they’re merged, the FTC’s hands are tied if the hospital engages in anticompetitive behavior.