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Provider Consolidation Effects

By December 6, 2016Commentary

The November MedPAC meeting included a discussion of the effects of provider, primarily hospital, consolidation, followed by a summary on the MedPAC blog.   (MedPAC Blog)   This is an excellent analysis of the issues and concerns and the state of the research.  As the blog post notes, there has been very, very substantial vertical and horizontal provider consolidation over the last decade.  This has led to commercial hospital rates that are 50% higher than hospital costs and 50% to as much as 300% higher than what Medicare pays for the same service.  Hospital all-payer profit margins reached a 30-year high in 2014, averaging 7.3%.  Since Medicare margins are often non-existent, that means profits on commercial business must be well into the double digits.

The blog goes on to note that there are several credible pieces of research linking provider consolidation to higher prices.  These higher prices also reflect higher input costs, in fact the ratio of input costs to prices is similar in the US and other developed countries.  So why are our input costs and prices higher.  It appears that it is the high prices that at least partly lead to high costs.  Here is a really visible example that I have railed about before–“non-profit” hospital managers are often paid multiple millions a year, and compensation for the entire management team quickly gets excessive to justify the CEO salary.  Literally makes me want to puke.  We have all seen the granite, marble and fancy wood used in construction of various hospital buildings–also a result of high profit margins.  The blog post points out that when providers are under price pressure, they magically seem to find a way to restrain costs.

The post notes four strategies used to try to limit hospital pricing power, like transparency, ACOs, reference pricing; but none of those is likely to make much difference.  I personally strongly favor a nationwide effort to force divestment in large hospital systems.  The post finally expresses concern that if health systems continue to let their costs grow, they may push harder for Medicare price increases, and if they get him, beneficiary access could suffer.  Time for Congress to act on this issue, oh wait, they get a lot of contributions from those health systems and overpaid executives.

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