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Hospital Consolidation

By November 21, 2013Commentary

We have expressed concern for some time now about the role of hospital pricing in hospital spending increases and the leverage that hospital consolidation activities, horizontal and vertical, create to allow hospital systems to demand higher prices.  Several significant pieces of research support this concern.  The authors of an article in the Journal of the American Medical Association summarize the results of hospital consolidation in the United States.  (JAMA Article)   The authors first paint the changing landscape; even a decade ago most medium to large-sized urban areas had multiple independent hospitals which generally focused on inpatient care, with a scattering of outpatient clinics.  Now even the largest cities are dominated by a few systems which increasingly own large primary care practices and a variety of vendors of care across all sites.  Some of the inpatient hospital consolidation has been driven by declines in inpatient days, which generally is a good thing since inpatient care is relatively expensive, and some reflects the poor financial condition of acquired hospitals.  From 2007 to 2012 there were 432 hospital merger and acquisition transactions involving 835 hospitals and 60% of hospitals are part of a health system.  Hospitals now own over 50% of physician practices, a doubling since 2004.  Hospitals have also greatly expanded their ownership of home health services, hospices and skilled nursing facilities.  Almost half of all health care regions are considered highly concentrated by the most common antitrust measure and another third are moderately concentrated.  Not one is considered highly competitive.

Theoretically, the creation of these large health systems could improve care coordination and provide better quality oversight at all sites of care.  They also theoretically could lower prices by better controlling costs through synergies and scale purchasing effects.  There is little evidence that would support the occurrence of either.  In fact, the evidence very strongly suggests that hospital consolidation has led to higher prices, particularly in the commercial segment.  Government programs such as Medicare and Medicaid can to some extent dictate prices, likely leading to even greater price increases for private health plans.  And since the health plan market has also become quite concentrated, the result is a complicit agreement among oligopolists to pass higher prices on to the ultimate payers–employers, patients and the working population which bears an increasing share of insurance premiums.  Regulation of health care pricing is one poor option to control excessive pricing; a better one would be to explore breaking up these systems, both horizontally and vertically.

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