By KEN TERRY
Far more attention has been devoted to the ways in which industry consolidation has driven up health costs than to proposals on how to remedy the situation. But the introduction of Medicare for All and Medicare for More bills—however dim their short-term prospects are—has changed the terms of the debate. It is time to think about how we can eliminate the market power of health systems without causing harmful dislocations in health care and the economy.
Before we get to that, here are the main facts about consolidation: As a handful of health insurers have become dominant in many markets, health systems have done likewise in order to maintain or improve their negotiating positions. That has proved to be an effective strategy in many cases. Even dominant health plans cannot do without the largest hospital systems in their areas, especially when they employ many of the local physicians.
According to a Kaufman Hall report, 90 hospital and health system deals were publicly announced in 2018. This was a decline from the 115 deals unveiled in 2017, but the average size in the revenue of sellers hit a high of $409 million.
The biggest provider mergers are staggering in scale. In February 2019, for example, Catholic Health Initiatives and Dignity Health formed a new organization called CommonSpirit Health, which has 142 hospitals, 150,000 employees and nearly $30 billion in revenues. The union of Chicago-based Advocate Health Care and Wisconsin’s Aurora Health Care in April 2018 created a giant with 27 hospitals and $11 billion in revenues. A month later, Atrium Health (formerly Carolinas Healthcare System) joined with Wake Forest Baptist Health to form a system with 49 hospitals and combined revenues of $7.5 billion.
Extracting higher prices
A substantial body of research shows that health systems use their market power to raise prices. For example, a 2016 study found that hospital prices in California grew by an average of 76% per admission between 2004 and 2013. Prices at hospitals belonging to large, multi-hospital systems grew substantially more (113%) than prices paid to all other California hospitals (70%). By the end of the period, average prices per admission at hospitals in the largest systems exceeded prices at other hospitals by about $4,000, or 25%.
Another study found that there were over 1,400 hospital mergers in the U.S. from 1998 to 2015. At the end of this period, nearly half of hospital markets were highly concentrated, dominated by one or two large health systems. Hospital admissions in these areas cost $2,000 more, on average, than admissions elsewhere, the authors noted.
A recent RAND study found that that commercial insurers paid hospitals an average of 241% of Medicare rates in 2017. One interpretation of this data, the researchers said, “is that hospitals, especially ‘must-have’ hospitals, have used their negotiating leverage to extract unreasonable price concessions from health plans.”
Health systems have also integrated vertically with physicians as their practice purchases have accelerated in recent years. Between those acquisitions and the increasing percentage of residency graduates who go to work for hospitals, hospitals now employ 35% of physicians directly or indirectly, according to the American Medical Association. Another survey by the Physicians Advocacy Institute and Avelere Health indicates that 44% of physicians were employed by hospitals in 2018, compared to 25% in 2012.
While hospitals offer a variety of explanations for employing physicians, the real reasons boil down to two: they want to lock up the doctors who refer patients to their facilities, and they want to make sure their competitors don’t lock up those same doctors.
Until recently, hospitals had another incentive to buy practices: Under Medicare payment rules, physicians who worked for hospitals were considered part of hospital outpatient departments (HOPDs), and their services could be billed at a higher rate (including facility fees) than private practice physicians could charge Medicare. To even the playing field, the Centers for Medicare and Medicaid Services (CMS) has begun to implement “site-neutral payments,” but the final outcome remains in doubt.
Meanwhile, hospitals use their market power to negotiate higher commercial payment rates for their employed doctors. A study of claims data from commercial insurers found substantial differences between the prices negotiated by employed groups and private practices across the country. In two-thirds of the areas included in the study, physician prices increased as the result of practice purchases by hospitals. Another study found that physician prices rise nearly 14% when a hospital acquires a physician group.
Most important to hospitals is the downstream revenue generated by employed physicians. In 2016, the average net revenue that each employed doctor generated for her hospital was $1.56 million, up 7.7% from $1.45 million in 2013, according to physician search firm Merritt Hawkins. In 2019, the same company conducted a survey showing that independent and employed physicians generated an average of $2.38 million each for their affiliated hospitals.
What the government can do
What all of this shows is that much of the growth in health spending can be attributed to industry consolidation. However, the Federal Trade Commission (FTC) has tried to stop very few hospital mergers; and, as health economist Paul Ginsburg has pointed out, federal antitrust policy doesn’t directly address hospital acquisitions of physician practices. Even if the FTC were to suddenly take an interest in healthcare mergers and the courts were more disposed to rule against not-for-profit entities, consolidation has gone too far for antitrust regulators to have much effect. After all, the FTC is not going to break up corporations that include thousands of hospitals and hundreds of thousands of physicians.
The solution, therefore, lies elsewhere. My argument, in brief, is that the Medicare for All and Medicare expansion proposals create a new space for countering industry consolidation, should anything come of these ideas.
Obviously, if the U.S. adopted a single payer system, the government could set hospital fee-for- service payments or give each hospital a global budget. But if Medicare for All meant that hospitals would get paid at Medicare rates, both conservative and liberal experts say, many hospitals would be seriously damaged. The adverse impact would vary, depending on how much of a particular facility’s revenues came from private insurance. But in the aggregate, a Stanford University study estimated, the average hospital would see a net decline of 16% in revenue and a negative margin of 9%. As many as 1.5 million jobs could be lost as a result.
A Democratic Congress under a Democratic President is more likely to pass a bill like Medicare for America, which grew out of proposals from the Center for American Progress and Yale health policy expert Jacob Hacker. In brief, this legislation would achieve universal coverage by enrolling the uninsured, people who buy individual insurance and those on Medicare, Medicaid and CHIP. Large companies could continue to provide insurance to their workers, or they could let their employees enroll in Medicare and pay 8% of payroll to the Medicare Trust Fund. Employees could also opt out of their company’s insurance plan and enroll in Medicare on their own. Over time, it’s possible that this model would morph into Medicare for All.
During the transitional period, states could curtail health systems’ market power by adopting “all-payer” models similar to those in Maryland and West Virginia. Under Maryland’s law, every insurer, including Medicare, Medicaid, and private health plans, pays uniform hospital rates negotiated between the state and the hospitals. In Ginsburg’s view, it would be impractical for other states to replicate this model, which Maryland introduced 40 years ago, because commercial rates are now so much higher than Medicare and Medicaid rates. A more feasible approach, he said, would be to emulate West Virginia, which sets only commercial insurance payments to hospitals. But in either case, an all-payer system would eliminate the ability of dominant health systems to extract higher rates from private payers.
All-payer systems are not a panacea. Maryland’s hospitals, for instance, raised the volume of services to compensate for lower payment rates under the all-payer law. As a result, the state introduced global budgets for hospitals, fully implementing them in 2014 after a phase-in period. Hospital cost growth dropped in the ensuing years, but ambulatory and post-acute-care costs grew more rapidly than before. This is prima facie evidence that it’s impossible to restructure just one part of the healthcare system.
To prevent hospitals from using their market power to obtain higher rates for their employed physicians, the government could simply prohibit them from employing doctors. This would not only curtail spending growth, but would also allow more physicians to form group practices and ACOs in which they could be incentivized to pursue value-based care. The incentive of hospital-employed doctors to emphasize value-based care will always be limited, because hospitals’ business model is based on filling beds, not emptying them.
The legal basis for mandatory divestment could be derived from state “corporate practice of medicine” laws that bar corporations from employing physicians. Found in many states, these measures were enacted to avoid conflicts of interest between physicians’ duty to provide the best care for their patients and their employers’ dictates. Most states with such laws allow hospitals to hire doctors, however, since they’re also in the business of medicine.
The sole exception is California. That state’s corporate practice of medicine law prohibits any non-professional organization except for a public hospital, a narcotics treatment program or a nonprofit medical research firm from directly employing physicians. Unfortunately, the California corporate practice of medicine law has not had the intended effect. Instead of hiring doctors, private hospitals and health systems simply lease their services from “foundations” that stand in for professional corporations.
But the states could enact stronger laws that prohibit hospitals from directly or indirectly employing doctors. It’s unclear whether most hospitals would be worse off economically if their medical staffs were independent rather than employed. Considering the losses that hospitals incur on their owned practices, some hospitals would benefit financially from divesting them. The hospitals’ main concern would be to prevent competitors from controlling their referring doctors. If no health system could employ physicians, that wouldn’t be a problem.
States versus the federal government
Considering the variability of states’ responses to the Affordable Care Act, it’s not likely that all or most of them would enact all-payer laws or corporate practice of medicine statutes that applied to hospitals. Realistically, only the federal government could make these things happen. Perhaps all-payer laws in some states—at first just for commercial plans–could help pave the way for a single-payer system under the gradualist scenario of Medicare for America. And when enough people joined Medicare, maybe Congress could pass a national corporate practice of medicine law. These changes might occur in a number of different ways. But, while individual states could serve as laboratories to test and adjust these policies, ultimately the federal government would have to implement them nationwide.
In the current environment, there is no political will to make such radical changes. Congress would have the impetus and the popular support to move in this direction only if the country were transitioning toward a single payer system. But I believe that that day is coming, and when it arrives, it would be far better to eliminate the market power of hospitals than to reduce their revenues to the point where many of them could no longer function properly or would be forced to close. The healthcare system needs to be restructured, not destroyed.
Ken Terry is a veteran healthcare journalist and the author of Rx for Health Care Reform (Vanderbilt University Press, 2007). This article is adapted from a forthcoming book.