iProtean—Mergers: The Reality is Complex

“Excessive market concentration” may be one of the best-known causes of high healthcare costs, reported the New York Times last week (“Health Care’s Overlooked Cost Factor,” New York Times, June 11, 2013). Hospital consolidations have contributed to highly concentrated hospital markets, and consolidations continue today. The article notes there have been more than 1,000 hospital system mergers since the mid-1990s, “often involving dozens of hospitals.”


The results of consolidation on these markets are stunning, according to the article’s author.  For example, various studies show that:

  • Hospital prices rise by about 40 percent after the merger of nearby rivals
  • Hospital mergers increase the number of uninsured in the vicinity
  • Market concentration may hurt the quality of care


Even though healthcare spending has slowed over the last two to three years, it still “outpaces inflation by a significant margin,” the article said. The author cited a recent report by the Health Care Cost Institute that the increase of healthcare spending of Americans under 65 in the last two years has been driven entirely by rising prices, not by more use.


The Affordable Care Act could help reduce prices. Health plans in the health insurance exchanges will be forced to compete on price, causing them to pressure medical providers to limit costs. However, accountable care organizations “may prove anticompetitive,” the author noted, referencing a jump in merger activity in anticipation of the law’s coming fully into effect.


So how does this information square with what we reported in last week’s blog? If you recall, we reviewed a new report from the American Hospital Association and the Center for Healthcare Economics and Policy that concluded that mergers “are pro-competitive and fully support the twin goals of higher quality and more affordable health care.”


We checked with iProtean expert Marian Jennings (Marian Jennings Consulting) about these apparently contradictory reports. She had this to offer:


“I remember to this day the adage of my high school English teacher, that ‘truth is a halfway house between extremes.’  I have found this often to be so—especially in the complex environment in which we work. It may be easier to make it an either-or proposition, but there are kernels of truth in both camps.


“Those who tout mergers as a panacea leading inexorably to great efficiencies and quality are at one end. Those who say it is all about market clout are the on other. (P.S., no one has market clout with Medicare, the largest payer by far for most hospitals, and I still don’t know of any systems that get paid anywhere near full cost for Medicaid.)


“Hospitals, historically a highly fragment industry with little consolidation, have operated under a oligopsony  (yes, this is a real word = a concentration of buyers) for decades, where Blue Cross plus Medicare plus Medicaid covered more than75 percent of the population in most markets (sometimes are high as 90 percent).  It is amazing that the hospital sector has lasted in as fragmented a state for as long as it has.


“Payers are right to scream about all of the cost shifting. And perhaps larger systems are more successful at this than individual hospitals. But the underlying problem is not only system formation, but the ridiculous payment system we have in place, the willingness of private insurers to accept cost shifting for as long as they have, and the inability of most hospitals to at least breakeven on Medicare, their largest payer.


“So, the reality is complex.”


iProtean subscribers, for more information on mergers and acquisitions, please note the two advanced courses: Affiliation & Consolidation Strategies, Part One and Part Two in your course library. These courses feature Marian Jennings, Lisa Goldstein, Dan Grauman and Monte Dube. In addition to information on the independence dashboard, these experts discuss the continuum of options available to hospitals when considering formal partnerships/consolidations with another organization, emerging models for consolidation and how consolidation affects credit ratings.




For a complete list of iProtean courses, click here.



iProtean Symposium & Workshop

Mark the Date!! October 2 – 4, 2013 at The Lodge at Torrey Pines, La Jolla, CA. Faculty: Michael Irwin (Citigroup), Todd Sagin, M.D., J.D. (Sagin Healthcare Consulting), Dan Grauman (DGA Partners), Pam Knecht (ACCORD LIMITED), Barry Bader (Bader & Associates), Ed Kazemek (ACCORD LIMITED).  For more information, click here.


For more information about iProtean, click here.