Fewer Hospitals May Lead to Higher Prices

Obamacare is coming and with it a new wave of hospital consolidation

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On July 16, two New York City hospital networks announced they were merging to create the largest health care system in the metropolitan area and one of the biggest in the country. The CEO of one of the hospitals said the merger would pave the way for more “efficient” and “integrated” care. Joining the two networks into one entity — to be called the Mount Sinai Health System — would also compensate for “the inability of the federal government or the state governments to be able to pay for the health care that people in the past have demanded,” he told the New York Times.

Put another way, the new large system will have more market power that may allow it to demand higher reimbursements from private insurers, ultimately raising costs for consumers.

Consolidation like this is happening all over the country, as hospitals acquire each other and merge in a trend that started decades ago and may be accelerated by the new health care law. This consolidation reduces competition in markets and gives hospitals more leverage to raise prices.

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“It’s very common that mergers between large entities, even in large urban areas, can have substantial anticompetitive effects,” says Martin Gaynor, a professor of economics and health policy at Carnegie Mellon University.

The new Affordable Care Act, which expands health-insurance coverage and cuts half a trillion dollars from Medicare, aims to slow the growth in health care spending by encouraging more coordinated patient care and rewarding quality over quantity. Architects of the law say new entities called “accountable care organizations” or ACOs, will encourage health care providers to work together and share in the savings that results from more efficient delivery of medicine. These new provider coalitions, which could be individual large systems providing integrated care or multiple providers working in concert, will be paid by Medicare, in part, based on the size of their populations, rather than for each separate health care service provided.

But ACOs may also reduce competition by encouraging hospital systems to be bigger simply to manage those larger populations. “Will some of these organizations be kind of sham organizations where they’re using the ACO label as cover and they’re actually anticompetitive organizations?” asks Gaynor. “That is a concern that I have.”

Melinda Hatton, general counsel for the American Hospital Association (AHA), says hospitals have no choice but to consolidate. Insurers are banding together, and the federal government underpays for services through Medicare and Medicaid, says Hatton. “I know there are a lot of academics who do studies, and God bless them,” she says. “But payers are increasingly using their leverage to drive down prices.”

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Carnegie Mellon’s Gaynor says there have been more than 1,000 hospital mergers since the 1990s. A report issued by the AHA in June says 551 hospitals were acquired by other health systems between 2007 and 2012, but says in most markets, there were still plenty of hospitals competing with one another afterward. (This will be true in New York City even after the Mount Sinai merger.) An AHA briefing paper points out that the ratings agency Moody’s said in 2012 that the financial outlook for hospitals was negative. AHA also argues that the fact that health-care-spending growth is relatively low right now proves that consolidation among hospitals is not driving prices upward.

Hatton says prices at a huge merged health care system may be higher than another smaller hospital because of better quality and patient preference. “An Apple computer costs more than a Dell computer. It’s a better computer, and it’s what people want,” she says.

A paper co-authored by Gaynor and funded by the nonpartisan Robert Wood Johnson Foundation, however, found that hospital mergers can increase prices dramatically. The paper, which analyzed previously published academic studies on the topic of hospital market concentration, concluded that consolidated hospital systems can drive prices as much as 20% to 40% higher. If a newly merged health care system is so dominant in a community that local insurers must have the system in their networks, the hospital has enormous leverage.

Gaynor’s research is challenging to do in part because the prices hospitals charge uninsured patients and private insurers are typically secret. Asked whether more price transparency might be able to prove that hospital consolidation does not drive up prices, Hatton said a better course would be for private insurers to spell out for their customers how much out-of-pocket costs would be for various treatments and procedures.

“I don’t know if, from a proprietary interest, putting out negotiated prices is something that actually adds to a competitive market,” says Hatton’s colleague Rick Pollack, executive vice president of the AHA.

It’s yet one more aspect of the health care industry that makes it different from others. Consumers (patients) don’t pay for goods (health care) directly. The presence of negotiated insurance contracts in the middle makes it all but impossible for those needing health care to be informed shoppers — even if there are multiple hospitals to choose from.

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