Hospital Consolidation: Health Care’s Overlooked Cost Factor

The New York Times by Eduardo Porter –

June 11, 2013:

When the Evanston Northwestern Healthcare Corporation merged its two hospitals with the neighboring Highland Park Hospital just north of Chicago 13 years ago, the deal was presented as an opportunity to increase efficiency and improve the quality of patient care.

But when the Federal Trade Commission finally decided to look at the deal, it encountered an entirely different objective: to gain market power.

Mark Neaman, Evanston’s chief executive, had told his board that the deal would “increase our leverage, limited as it might be,” the investigation found, and “help our negotiating posture” with managed care organizations.

The commission caught Ronald Spaeth, the Highland Park C.E.O., talking about the corporation’s three hospitals and explaining how “it would be real tough for any of the Fortune 40 companies in this area whose C.E.O.’s either use this place or that place to walk from Evanston, Highland Park, Glenbrook and 1,700 of their doctors.”

It was a great deal for the hospitals. The fees they charged to insurers soared. One insurer, UniCare, said it had to accept a jump of 7 to 30 percent for its health maintenance organizations and 80 percent for its preferred provider organizations.

Aetna said it swallowed price increases of 45 to 47 percent over a three-year period. “There probably would have been a walkaway point with the two independently,” testified Robert Mendonsa, an Aetna general manager for sales and network contracting. “But with the two together, that was a different conversation.”

And who was left holding the bag? Not the shareholders of UniCare or Aetna. It was the people who bought their policies, who either paid higher premiums directly or whose wages grew more slowly to compensate for the rising cost of their company health plans.

The commission’s unusual investigation of the aftermath of the Evanston-Highland Park deal produced its first successful antitrust case against a hospital merger since 1990, after a string of defeats in court. Highland Park and Evanston were forced to negotiate separately with insurers, rather than as a bundle. Collusion was forbidden.

What was learned from the investigation is more relevant than ever today. It should draw policy makers’ attention to an elephant in the room that appears to have been overlooked in the debate over how to rein in the galloping cost of health care: a lack of competition in what is now America’s biggest business — accounting for almost 18 percent of the nation’s gross domestic product.

Our anguished search for ways to slow runaway health spending has so far mostly focused on how to eliminate waste: Might the fee-for-service system used by health care providers across the nation provide perverse incentives for doctors and hospitals to prescribe costly yet pointless treatments? Are doctors prescribing every possible test to insulate themselves from any conceivable lawsuit?

The Obama administration is betting heavily on waste control to address the problem. It has offered incentives for accountable care organizations, which get a bundled payment to keep a patient in good health rather than charge for individual procedures. It has financed research into comparative effectiveness — hoping to steer patients to the best therapies.

What is missing from the stampede of policy innovation is something to tackle one of the best-known causes of high costs in the book: excessive market concentration.

Two decades ago, there were on average about four rival hospital systems of roughly equal size in each metropolitan area, according to research by Martin S. Gaynor of Carnegie Mellon University and Robert J. Town of the University of Pennsylvania. By 2006, the number of competitors was down to three.

The share of metropolitan areas with highly concentrated hospital markets, by the standards of antitrust enforcers at the Justice Department and the Federal Trade Commission, rose to 77 percent from 63 percent over the period.

And consolidation is continuing. Professor Gaynor counts more than 1,000 hospital system mergers since the mid-1990s, often involving dozens of hospitals. In 2002 doctors owned about three in four physician practices. By 2008 more than half were owned by hospitals.

If there is one thing that economists know, it is that market concentration drives prices up — and quality and innovation down.

Research by Leemore S. Dafny of Northwestern University, for instance, found that hospitals raise prices by about 40 percent after the merger of nearby rivals.

Other studies have found that hospital mergers increase the number of uninsured in the vicinity. Still others even suggest that market concentration may hurt the quality of care.

Indeed, for all the emphasis on curbing waste, recent evidence suggests that health care costs are not being driven by intensive use of high-tech procedures as much as by rising prices for even the most humdrum treatments, which are today among the most expensive in the world.

“The primary drivers of health care costs are prices,” said Professor Dafny, who was appointed last year to the newly created post of deputy director for health care and antitrust at the F.T.C. “Utilization growth is slowing.”

The rate of increase in health care spending has slowed. Since 2009 health care spending has been growing less than 4 percent per year, the slowest rate in more than half a century, according to number crunchers from the Office of the Actuary at the Centers for Medicare and Medicaid Services. But it is still outpacing inflation by a significant margin, despite a sharp slowdown in the use of medical services.

And according to the Health Care Cost Institute, an academic institute started two years ago, the rising health care spending of Americans under 65 in the last two years has been driven entirely by rising prices; not by more use. The unit price of inpatient care jumped 5.9 percent last year, while the price for outpatient services increased 9.6 percent.

Between 2009 and 2011 the fee for an outpatient visit to the emergency room rose 17 percent. The price of a routine office visit to a primary care doctor rose 8 percent. The price of radiology services rose 12 percent.

Some parts of the government are worried about competition. Since the Evanston case, the Federal Trade Commission has won about half a dozen cases against hospital mergers.

Corporate America could help more. Large companies, like Wal-Mart Stores, Lowe’s and PepsiCo, have cut deals with hospitals like the Mayo Clinic or the Cleveland Clinic to provide specialized care, including cardiac care or spinal surgery, for all their workers across the nation. This will allow them to get around the market power of local hospitals. Others could follow their example.

The Affordable Care Act could help reduce prices too. Forced to compete on price, plans in the new health insurance exchanges will pressure medical providers to limit costs, much as H.M.O.’s did briefly in the 1990s. The “Cadillac tax” on high-end health plans will also encourage some companies to drop high-priced policies.

But some provisions of the health care overhaul are potentially troubling. Professor Gaynor, for instance, worries that accountable care organizations may prove anticompetitive. Merger activity has jumped in anticipation of the law’s coming fully into effect.

“Hospitals want to maintain their revenue streams and enhance their bargaining leverage,” said Professor Gaynor. “This is a way to do so.”

To “bend the curve” of health care costs downward, their leverage must stop growing.

Source: John & Rusty Report via Choice Admin