Purchasers of health care, long-time supporters of organized systems of care, are watching with growing alarm as horizontal and vertical mergers between providers accelerate.  Buyers with experience in other sectors understand that consolidation can improve efficiency, quality, and the generation of capital, especially where there is excess capacity and abundant waste. They are equally aware, however, that ‘over’-consolidation can lead to pricing power, the absence of competition, and the crowding out of disruptive innovations.

Catalyst for Payment Reform(CPR), a non-profit working on behalf of large employers and public health care purchasers to improve the quality and affordability of health care through payment innovation, convened a National Summit on Provider Market Power on June 11th in Washington D.C.

There, the nation’s leading experts discussed and debated how to maintain enough competition among health care providers to stimulate improvements in the delivery and affordability of care.

Participating experts stated that by as early as 2006, over 75% of U.S. metropolitan statistical areas (MSAs) had experienced enough hospital mergers to be considered ‘highly consolidated’ – a trend that continues. Economists agreed that the evidence demonstrates that highly-consolidated providers can raise prices considerably. Provider leaders offered their views on why consolidation is occurring, including to meet the demands for integration and efficiency, to counterbalance a highly-consolidated health insurance market, and to have enough income to invest in IT systems and other infrastructure necessary for population management.

Employers made the point that while experts argue about over-consolidation versus integration, an irreversible “cycle of consolidation” exists in some markets that may be impossible to undo; as doctors and hospitals form larger organizations and federal and state budget pressures continue to constrain Medicare and other public program payments, providers will use their increased market power to demand large price increases from health insurers and employers.

With limited competition in local markets, employers will have no choice but to absorb these increases and pass them on to employees. Due to the unique nature of provider organizations, frequently the largest and most admired employers in their communities, political and social forces will attenuate vigorous anti-trust action and leave limited ability to break-up these dominant entities.

In addition it is possible that newer proposed mergers, which could enhance competition, will be challenged, inadvertently cementing the status quo.  The upshot of this cycle will be health organizations that are “too big to fail,” resulting in less affordable care.  The recent piece in Health Affairs that questioned whether cost shifting actually occurs in the wake of lower Medicare payments doesn’t alter the fact that dominant organizations have the power to raise prices.

The Summit made it clear that different stakeholders view the issue of provider market power differently.  But a handful of conclusions came out of the Summit that most would likely support.

First, data are not yet definitive about whether we are witnessing integration or over-consolidation. All parties agreed that we need pro-active, independent monitoring and evaluation.

Second, most parties agreed that action needs to be taken in the short term to enhance competition. Public and private sector leaders alike should continue what is now a national movement to advance price transparency.  A 2010 study by the Center for Studying Health System Change for CPR, and CMS’ recent release of hospital charge data together show striking variation in both what providers charge and ultimately get paid.  Many argue these differences reflect some providers’ ability to charge higher than competitive prices.  For this information to be useful to consumers we need to translate it into what they will actually pay and combine it with salient quality information.

Third, payers need to design benefits and service offerings that create incentives for consumers to shop based on value. Although consumerism is by no means the sole answer to driving value, it is an important tool. For example, CalPERS, California’s public employee retiree system, has already succeeded in bringing down its spending on hip and knee replacement surgeries by 30 percent by using reference pricing.  CalPERS members can still get high quality surgery, but at facilities that charge a reasonable price.

Ultimately, we need new approaches on the payer side, more public and private sector coordination and potentially even regulation, to ensure that the unprecedented transformation of the delivery system results in the positive potential of integration rather than the negative consequences of over-consolidation.

CPR hopes that the conversation at the National Summit is the beginning of a productive dialogue among all stakeholders in health care going forward.

Robert S. Galvin, MD is a nationally recognized leader in the areas of market-based health policy and financing, quality measurement and payment reform, co-founder of the Leapfrog Group, Bridges to Excellence/PROMETHEUS and Catalyzing Payment Reform, all innovative non-profits that have helped drive the quality agenda. He is currently the CEO of Equity Healthcare (EH), which oversees the management of health care for firms owned by private equity companies. Prior to this, Galvin was Executive Director of Health Services and Chief Medical Officer for General Electric (GE).

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9 Responses for “Will “Too Big to Fail” Come to Health Care?”

  1. Mitch Collins says:

    There is a way pricing power can be addressed….employers can allow their employees to move to exchanges and cap what they provide for coverage, leaving ee’s to hold the bag. A messy solution but one that will happen.

    Who thought that GM would suspend its 401(k)?

    • George says:

      Or change up the retirement plan completely. Our country is like when the Titantic was falling and the music was playing, just about ready to collapse.

  2. Doug Arnold says:

    Did the Summit participants discuss the issue of National Insurer Market Power? I’m guessing not.

    In most states and virtually all metro areas a few big insurers have monopoly power. They have set fees and dictated prices to physicians and hospitals and done their best to disaggregate providers. But when the aggregation of market power is on the other side they scream to break up the monopolies.

    Many health insurers have spent the last few decades doing their best to divide and conquer physicians, especially, for contracting and pricing, often using contracts on a “take it or leave it” basis (here’s your new fee schedule…not negotiable.). Being exempt from federal antitrust laws (McCarron-Ferguson Act of 1947) sure has given the big insurers the upper hand here. However, now the insurers are faced with the need to contract with organized groups of physicians and hospitals who can coordinate care quality and care management as part of commercial ACO deals. Many of the insurers are still trying to “have their cake and eat it too” by still wanting to have individual physician and hospital contracts for pricing terms, but ACO contracts with provider organizations that don’t involve fee schedule negotiations, but have quality and shared savings provision in the aggregate.

    A fully free market for health information exchange should include pricing and payment information. However, most commercial insurers, and all the big ones, include strict confidentiality provisions with penalties for any disclosure of payment terms in their contract with providers.

    When the shoe fits…..

    • Doug,
      I don’t disagree that insurer market consolidation is problematic and has largely contributed to the nefarious status quo we’ve all inherited. However, the emergence of insurance exchanges, local and federal, as well as limits on MLRs, regulations on transparency (such as the recent ones issued in Rhode Island) and laws enacting APCDs, have all but eroded the insurer edge.
      On the other hand there seems to be very little ex-post enforcement of anti-trust actions against providers. In a recent paper with Mark McClellan and others, one of the reforms we suggest is the continuous monitoring of ACOs and other “land-grabbers” to ensure that their actions are not leading to artificially inflated prices relative to other markets or the the rest of the market. That’s simply a reasonable way to ensure that the purported goal of ACOs — deliver greater value — is actually followed through and not a sham for exercising monopolistic behavior.
      And as an aside, despite the market consolidation of insurers in some areas, they have been woefully ineffective at limiting price increases from providers (and I am talking about price here, not use). And that’s really what worries us. The track record of provider consolidation to-date is pretty clear and unambiguous….price increases, not value increase.

  3. tomintexas says:

    While routine “lesser cost” services will of necessity be provided locally, there is a case to be made that more expensive procedures may become increasingly vulnerable to international access. Already there is a history of “surgery vacations” and increased construction of foreign facilities to accommodate predicted growing demand. Healthcare providers need to look at the disastrous results from comparatively excessive U.S. manufacturing costs to project what could happen in the delivery of healthcare as well.

  4. We need to have more positive results out of the integration rather than the negative fame from over-consolidation. New approaches, and more private and public sector coordination and regulation are required.

  5. Mighty Casey says:

    And, as usual, patients are left to watch the grownups talk over their heads like they were children. Or meat puppets.

    The ACA took a stab at giving patients some ascendancy in the conversation by requiring that everyone had insurance, and then … hit the #fail button when it came down to realizing where the real innovative shift lay: in ending employer-based group insurance.

    This consolidation reset has happened in different forms over every previous iteration of “reform,” with no thought to putting any power-of-the-purse in the hands of PATIENTS. Which is why each iteration of reform to date has not delivered much in the way of actual, um, reform.

    I know I sound like One-Note Jane on this topic, but after [redacted] years on the planet, with a significant portion of them spent covering this issue while simultaneously living with it, I’m more convinced than ever that, until we end the crazy get-insurance-at-your-job train we’re on, we’re stuck.

    Single payer? Swiss model? Frankly, I don’t care, so long as, in the post-job economy, we stop thinking insurance-at-your-job is a great idea …

  6. Pharmadir says:

    In my country we pay health insurence plus individual health care fees. It’s just another money machine so I guess that “Too big to fail” is already here. Sadly.

  7. I do agree that there should be new approaches on the payer side. Coordination and regulation are needed in order to protect the payers for paying more on what they are actually receiving. And with the absence of competition, companies have the liberty to adjust the prices for their own advantage. I just hope the people concerned will do something about this and give the payers the protection they need.

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