With healthcare mergers now announced seemingly every week, I’ve been giving some thought to scale: How big can/ should health systems be?
Anecdotally, I’m struck that the most impressive healthcare companies in America are super- regional players: Geissinger, Cleveland Clinic, UPMC, etc. They seem to get a lot more attention than the national players with hundreds of facilities.
Leaving aside questions like strategy (e.g. is integration of payers/doctors/hospitals the key to these successes), I’ve wondered whether regional systems are simply the right size to thrive. My suspicion is that even clever organizational structure (a topic which I wrote about last year) can’t overcome barriers that prevent large healthcare companies from innovating and thriving, particularly as companies move to risk and the business of healthcare becomes more complex. Like cellular organisms, large companies can outgrow their life support. (Interestingly, it’s actually the ratio of body volume to surface area [gas exchange, digestion, etc] that served as a constraint to organism size…)
I recently ran across a superb paper- a doctoral thesis written by Staffan Canback. Canback (who now leads the Economist Intelligence/ Canback predictive analytics consulting firm in Boston) wrote his thesis, called Limits of Firm Size: An Inquiry into Diseconomies of Scale in 2000, while a student in London. Canback argues, convincingly, that companies do become more efficient with scale, but reach a point where “diseconomies” begin to mitigate performance. This may seem intuitive: (as Canback notes, if efficiency only improved with scale then we would buy everything from one company that produces everything with great levels of efficiency). We don’t.
The role of the United States’ antitrust laws are to ensure competition, not to prescribe or favor any particular organizational structure. Yet recent Federal Trade Commission (“FTC”) enforcement actions in the health care provider merger arena have done just that – dictated that if provider groups want to integrate, they can only do so through contractual means, not by merging their businesses. Everyone accepts the proposition that health care integration is essential to improving health care and bending the cost curve. Yet often the FTC has been a roadblock to provider consolidation arguing that any efficiencies can be achieved through separate contracting. But this regulatory second guessing is inconsistent with sound health care and competition policy.
Health care provider consolidation poses some of the most challenging antitrust issues. Particularly challenging are efforts by hospitals to acquire or integrate with physician practices. There is clearly tremendous pressure from both the demand and supply side for greater integration between hospital and physicians. And arrangements between firms in a vertical relationship are treated solicitously by the antitrust laws, because they are typically procompetitive and efficient. Where competitive concerns arise from a merger or alliance, the FTC will ask if there are efficiencies from the relationship and, if so, whether there are less restrictive alternatives to achieve the efficiencies. If there is a less restrictive alternative, the FTC will claim the efficiencies should not be credited. So for example, if the FTC believes that contractual arrangements between doctors and hospitals can achieve comparable efficiencies, the FTC will reject the merging parties’ claimed efficiencies.
Orginally published June 6th 2014, back by popular demand. – The Eds
Sometimes big game hunters find frustration when their prey moves by the time they’ve lined up to blast it. That certainly appears to be the case with the health policy target de jour: whether providers, hospital systems in particular, exert too much market power. A recent cluster of papers and policy conferences this spring have targeted the question of whether hospital mergers have contributed to inflation in health costs, and what to do about them.
Hospitals’ market power appears to be one of those frustrating moving targets. The past eighteen months have seen a spate of hospital industry layoffs by market-leading institutions, and also a string of terrible earnings releases from some of the most powerful hospital systems and “integrated delivery networks” in the country. These mediocre operating results raise questions about how much market power big hospital systems and IDNs do, in fact, exert.
The two systems everyone points to as poster children for excessive market power-California-based Sutter Health and Boston’s Partners Healthcare, both released abysmal operating results in April. Mighty Partners reported a paltry $3 million in operating income on $2.7 billion in revenues in their second (winter) quarter of FY14. Partners cited a 4.5 percent reduction in admissions and a 1.6 percent decline in outpatient visits as main drivers. Captive health insurance losses dragged down Partners’ patient care results. Sutter did even worse, losing $22 million on operations in FY13 (ended in December), — compared to a gain of $697 million in FY11 — on more than $9.6 billion in revenues. A 3 percent decline in admissions led to FY13 revenue growth of 0.9 percent (that is, nine-tenths of one percent), against 7.3 percent in expense growth.