Effects of Provider Consolidation

By April 21, 2017Commentary

The horse is well out of the barn, but one of the leading causes of spending growth are price increases caused by provider consolidation, which policymakers have done basically nothing to stop.  A Medicare Payment Advisory Commission presentation looks at the impacts of this consolidation.   (MedPAC Presentation)   There are four types of consolidation that the staff considers:  horizontal hospital consolidation; horizontal physician consolidation; vertical consolidation of hospitals and physicians; and vertical consolidation of providers with insurance risk-bearers, whether by providers owning plans or plans buying providers.  Most markets are extremely consolidated at this point, both rural and urban.  On average, commercial prices paid to hospitals are 50% over the costs of delivering service and well above Medicare rates.  An increasing number of doctors practice in groups of over 50 doctors; from 16% in 2009 to 22% in 2014.  The ongoing trend of hospitals buying physician practices has led to higher Medicare payments because Medicare stupidly then pays a facility fee on top of the physician fee.  Commercial health plans also pay more for these hospital-owned physicians’ services.  Not only does Medicare pay more, but beneficiaries pay more via their 20% coinsurance on Part B services.  And of course now you get the worst of both worlds with hospitals that have bought physician practices combining, so you get a nice double whammy of more anti-competitive behavior.  Depending on market share, commercial payers pay 20% to 40% than Medicare does for the same service and the difference rises steadily with market share.   So much for the supposed efficiencies arising from scale!  Insurer/plan combinations have uncertain effects; they may or may not save money; they may improve quality slightly.

In terms of remedies, MedPAC has screamed for years that CMS is stop paying different amounts for the same service performed in the different settings.  This is a no-brainer unless you are a politician getting lots of provider political contributions.  There are only two other remedies that I think have any chance of working.  One is to do universal rate-setting; all payers pay the same, and frankly, you use Medicare rates as the basis.  If providers are going to behave uncompetitively and create a non-competitive market; they have to learn how to live with a lower rate set by government.  Or, and a much better approach in my opinion, you break up all this consolidation. You separate all the hospitals, you forbid hospitals from owning physician practices, other than hospitalists, you force physician specialty groups to break up.  Every market should have at least three or four viable competitors.  Providers, take your pick, but we really can’t afford the effects of consolidation.

Author Kevin Roche

The Healthy Skeptic is a website about the health care system, and is written by Kevin Roche, who has many years of experience working in the health industry through Roche Consulting, LLC. Mr. Roche is available to assist health care companies through consulting arrangements and may be reached at khroche@healthy-skeptic.com.

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