Provider Consolidation: Is
Bigger Better?
Robert A. Berenson, MD, FACP
Institute Fellow, the Urban Institute
rberenson@urban.org
Duncan Clark Lecture at the
New York Academy of Medicine
3 December 2014
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The Presentation Will -• Emphasize the pervasive problem of high and variable
provider prices
• Present the vision of Big Med through horizontal and
vertical consolidation and integration and the outcomes
to date showing lack of success but higher prices
• Explore why consolidation is not the right frame for
considering policy solutions to the pricing problem
• Discuss concerns that the current direction of public
policy could exacerbate the pricing problem
• ACOs – part of the problem or solution?
• Present a range of possible policy approaches
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Prices Are the Major Reason US
Spending Exceeds the Rest of the World
• Whether as per capita spending or as percentage of GDP
spent on health care
• “It's the prices, stupid: why the United States is so different
from other countries.” – Anderson et al., Health Affairs, 2003
• Accounting for the Cost of Health Care in the United States
– McKinsey Global Institute, 2008
“Input costs – including doctors’ and nurses’ salaries, drugs, and
other medical supplies, and the profits of private participants in the
system – explain the largest portion of additional spending… [the
$650 billion extra the US spends compared to world norms]”
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Trends in Payment to Cost Ratios
• Aggregate hospital payment-to-cost ratios for
private payers increased from about 115% in 2000
to about 149% in 2012
Avalere analysis of AHA Annual Survey Data, 2012, for community hospitals, AHA
Trendwatch Chartbook, 2014
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Prices Have Been the Main Driver of
Recent Health Care Costs Increases
• CMS actuaries in their annual report on national
health spending in Health Affairs found that factors
associated with price account for as much as 60%
of increases in spending until the last couple of
years, with population growth and use of services
accounting for the rest
Martin et al., “National Health Spending in 2012: Rate of Health Spending Growth Remains Low for the Fourth
Consecutive Year,” Health Affairs 33:67-77, 2014
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Prices As the Main Driver of Recent
Health Care Costs Increases (cont.)
• The Health Care Cost Institute published results of 20112013 price and utilization data – claims from Aetna, United,
and Humana (KP also part of consortium)
• Spending for ESI population in 2013 grew 3.9% and was
driven mainly by rising prices for medical services and brand
prescriptions rather than service use
 Inpatient – unit prices increased 4.5%, intensity level
increased1.7%
 Outpatient – unit prices increased 5.5%, intensity increased
0.2%
 Professional services – unit prices increased 0.7%, intensity
increased 1.8%
Health Care Cost Institute. 2013 Health Care Cost and Utilization Report. October 2014.
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Disagreement Among Analysts About
Current Trends
• Altarum Institute reports price growth at historic lows (history
started in 1990) as measured by the Health Care Price Index
 Aug 2014 prices 1.7% higher than Aug 2013; 12 month
moving avg. was only 1.4%, near the all-time low of 1.2%
 Hospital price growth only 1.7%
Altarum Institute. Health Sector Economic Indicators: Insights from Monthly Price Indices through August 2014 .
September 17, 2014.
• Health Care Cost Institute reported that in 2013 the use of
inpatient services decreased by 2.7%, while inpatient prices
increased 6.7%, likely due to a rising average intensity of
resource use.
 Use of outpatient services declined by 0.5%, while outpatient
prices increased by 5.8%
Health Care Cost Institute. 2013 Health Care Cost and Utilization Report. October 2014.
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The Mass. AG Study That Helped Define
the Issue of High Provider Prices
“Price variations are not correlated to quality of care, the
sickness or complexity of the population served, the extent
to which a provider is responsible for caring for a large
portion on Medicare or Medicaid, or whether a provider is an
academic teaching or research facility. Moreover, price
variations are not adequately explained by differences in
hospital costs of delivering similar services at similar
facilities. …
Price variations are correlated with market leverage as
measured by the relative market position of the hospital or
provider group…”
Massachusetts Attorney General. 2010. Examination of Health Care Cost Trends and Cost Drivers: Report for Annual
Public Hearing. Office of Attorney General Martha Coakley.
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And the Price Variations Are Huge
• Across 8 markets, from surveys, average inpatient rates ranged from
147% of Medicare in Miami to 210% in SF but ranged up to 500% for
inpatient and 700% for outpatient care
• Within market variations were marked also – hospitals at the 25th
percentile in LA County received 84% of Medicare payment levels while
the 75th percentile got 184%
Ginsburg, Paul B. "Wide Variation in Hospital and Physician Payment Rates Evidence of Provider Market
Power." Center for Studying Health System Change Research Brief No. 16, 2010.
• From review of paid claims in 13 markets, the average highest priced
hospital was paid 60% more than the lowest paid for inpatient services
and >100% more for outpatient
• In 3 markets, the highest priced got >2X’s lowest priced for inpatient care
White, Chapin, Amelia Bond, and James Reschovsky. "High and Varying Prices for Privately Insured
Patients Underscore Hospital Market Power." Center for Studying Health System Change Research Brief no. 27,
2013.
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Haves and Have-Nots
• MedPAC reports that in aggregate, hospitals contract at
about 140% of Medicare, but anecdotally, it is clear that
many “must haves” obtain >250% of Medicare, and as high
as 500-700%
• Insurer payment rates for physicians are at 120-125% of
Medicare overall but in Miami some are at 60-70% and in a
mid-west city as high as 900% -- and generally higher for
specialists than primary care compared to Medicare, which
already is skewed to favor tests and procedures
• Classic multispecialty group practices – prototypical ACOs –
reportedly negotiate at levels of “must have” hospitals >250% of Medicare – but now for both physician and
hospital services
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The Consolidation Frame
• Many reasonably frame the pricing power problem as one of
consolidation leading to market concentration, supported by
evidence that finds that beyond a fairly low threshold,
additional size does not improve quality or efficiency
• And there is no doubt that consolidation is active in many
markets today as in the late ’90s.
 In 1997 Victor Fuchs, the dean of health economists, then
wrote about the “stampede to consolidation”
 In 2014, Leemore Dafny, an antitrust economist wrote about
the current “merger frenzy” supported by data showing a
doubling of Mergers & Aquisitions recently compared to usual
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Why the Consolidation Frame is Not
Sufficient in Defining the Problem
• Ignores the reality of high prices enjoyed by “must haves”
often in less-concentrated markets, without M&A activity
• Ignores the reality of “have nots,” which are price takers,
rather than price makers, and have relatively low payments
– sometimes below Medicare levels pegged to avg. costs
• Points to antitrust policy as the prime antidote, rather than as
just one tool to address pricing power issues
• And slides over strong views by some about the concept of
ACOs as a community-based entity featuring collaboration
among providers and community-based social agencies, that
is, encouraging competitors to not compete
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Leverage Factors Unrelated to
Concentration/Consolidation
• While concentration, then, is the main story, other
factors contribute to growing provider market power
over prices and other contract “terms and
conditions”
 Employer rejection of narrow networks
 Reputation
 Geography
 Leveraging particular “monopoly” services – sometimes
fostered by understandable regulatory exclusion of potential
competitors
Berenson, Robert, Paul B. Ginsburg, Jon B. Christianson, and Tracy Yee. 2012. "The Growing Power of Some Providers
to Win Steep Payment Increases from Insurers Suggests Policy Remedies May be Needed." Health Affairs 31 : 973981, 2012.
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“We have clout not because of our size
but…who we are. Am I supposed to apologize
for that?”
– executive of an academic health center
Berenson, Robert, Paul B. Ginsburg, Jon B. Christianson, and Tracy Yee. 2012. "The Growing Power of Some
Providers to Win Steep Payment Increases from Insurers Suggests Policy Remedies May be Needed." Health
Affairs 31: 973-981, 2012.
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The Logic of Big Medicine
Through Consolidation and
Integration
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The Triple Aim
• “The Institute for Healthcare Improvement’s Triple
Aim is a framework that describes an approach to
optimizing health system performance. It is IHI’s
belief that new designs must be developed to
simultaneously pursue three dimensions, which we
call the “Triple Aim”:
 Improving the patient experience of care (including quality
and satisfaction);
 Improving the health of populations; and
 Reducing the per capita cost of health care.”
 From IHI website
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Atul Gawande’s “Big Med”
(New Yorker, August 13, 2012)
The Cheesecake Factory model for health care
“Big chains thrive because they provide goods and services of
greater variety, better quality, and lower cost, than would be
otherwise available. Size is the key. It gives them buying
power, lets them centralize common functions, and allows them
to adopt and diffuse innovations faster than they could if they
were a bunch of small, independent operations.”
 Emphasizes the goal of more standardized
approaches to diagnosis and treatment, replacing
autonomy – and wide variation – in decision-making
 Envisions 90 “super-regional” health care systems
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“10 Strategies to Lower Costs, Improve
Quality, And Engage Patients: The View
From Leading Health System CEOs”
• Governance priority
• Culture of continuous
improvement
• IT best practices
• Evidence protocols
• Resource use
•
•
•
•
•
Integrated care
Shared decision
making
Targeted services
Embedded
safeguards
Internal transparency
Cosgrove, Delos M., Michael Fisher, Patricia Gabow, et al. 2013. “Ten Strategies to Lower Costs, Improve
Quality, and Engage Patients: The View From Leading Health System CEOs.” Health Affairs 32:321-27, 2013.
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Integrated Delivery Networks
• Purpose is to integrate care across a continuum of providers
and assume responsibility for the health of populations
 Lower transaction and administrative costs with economies of scale
and scope
 Lower cost of care delivery through improved care coordination and
reductions in redundant care
 Better access to capital for HIT and other technological
improvements in care
 More stable environment for clinicians
 Sometimes includes the insurance function as well as delivery
Goldsmith, Burns, Sen, and Goldsmith, “Integrated Care Networks: In Search of Benefits and Market Effects,” Report for
the National Academy of Social Insurance Panel on Pricing Power in Health Care Markets
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Federal Initiatives That Promote
Toward Consolidation
• Accountable Care Organizations as a Medicare initiative
(more later)
• Delivery System Reform Payment (DSRIP) waivers in
Medicaid
 NYS using DSRIP waivers to promote collaborative provider
networks ( referred to as Performing Provider Systems or PPSs) that
have an anchor hospital, associated clinics, and others
• Quality reporting, Meaningful Use with EHRs, Value-based
Purchasing, etc.
• But Medicare and Medicaid set payment rates – they do not
negotiate with the larger entities that result
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Unfortunately, Despite the Claims,
the Evidence Does Not Support
the Logic and Advocacy for Large,
Consolidated Systems
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The Synthesis Project (Robert Wood
Johnson Foundation) – Update June 2012
Summary of key findings:
1.
2.
3.
4.
5.
Hospital consolidation generally results in higher prices (with new
evidence since 2012 confirming these findings)
Hospital competition improves quality of care
Physician-hospital consolidation has not led to either improved
quality or reduced costs
Consolidation without integration does not improve performance
Consolidation between physicians and hospitals is increasing
(although for various reasons, including to take advantage of FFS
payment rules, not only to form ACOs able to focus on population
health)
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Important Recent Studies On the
Impact of Vertical Integration
• Between 2009 and 2012, hospital-owned physician
organizations in California incurred higher expenditures for
commercial HMO enrollees for professional, hospital, lab,
Rx, and ancillary services than physician-owned
organizations
Robinson, James C. and Kelly Miller. “Total Expenditures per Patient in Hospital-Owned and Physician-Owned
Physician Organization in California.” JAMA, 312:1663-1669, 2014.
• Using Truven Market Scan data from 2001-07, researchers
found an increase in market share of hospitals with the
tightest vertically integrated relationship with physicians –
ownership – was associated with higher hospital prices and
spending and only slight decrease in frequency of admission
Baker, Laurence, M. Kate Bundorf, and Daniel P. Kessler. “Vertical Integration: Hospital Ownership of Physician
Practices is Associated with Higher Prices and Spending.” Health Affairs, 33:756-763, 2014.
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High Prices Eat Low Service Use for Lunch
• Dartmouth and subsequent analyses suggest that the
most efficient providers have service use profiles
perhaps 20% lower than average – MedPAC finds a
30% spread across geographic areas between the 10th
and 90th percentile once health status is correctly
factored in
• But prices vary far, far more than 20-30%
• Only through a pure “bending the cost curve” lens can
one consider Shared Savings or Total Cost of Care
contracting a win. These approaches basically accept
and even exacerbate wide price disparities between
haves and have-nots.
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Competitive ACOs or Community ACOs? A
Rarely Engaged, but Real Disagreement
• Many ACO advocates favor a non-competitive
context for ACO development (although rarely
addressing how a community-wide effort addresses
the potential for exercise of pricing power or the
actual governance structure), whereas mainstream
economists and antitrust experts want actively
competing ACOs – “integration and rivalry”
• Further, there is no settled view on whether vertical
integration in health care is generally pro- or anticompetitive
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“The Evolution of Integrated Health
Care Strategies”
• A literature review of 25 years of academic literature show
shifts in integration strategies over the period:
1. From a focus on horizontal to vertical integration
2. From acute care and institution-centered models to a
broader focus on community-based health and social
services
3. From economic arguments for integration to emphasis
on improving quality and value
Evans, Jenna M., Ross Baker, Whitney Berta, and Jan Barnsley. “The Evolution of Integrated Health Care
Strategies.” Advances in Health Care Management Volume 15: 125-161, 2013.
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“The Evolution of Integrated Health
Care Strategies” (cont.)
4. From evaluations of integration using an organizational
perspective to an emerging interest in patient-centered
measures
5. From a focus on modifying organizational and
environmental structures to an emphasis on changing
ways of working and influencing underlying cultural
attitudes and norms
6. From integration for all patients within defined regions to
a strategic focus on integrating care for specific
populations
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How About the Insurer Market and
Its Effect on Prices?
• Some markets have dominant insurers – mostly
BCBS plans -- and could “dictate” prices but don’t
• Terms like “truce” and “détente” are used to
describe current insurer-hospital system negotiating
climate, in the aftermath of “showdowns” in which
large employers failed to support insurers and
conceded on rates – at least as of 2010
Berenson, Robert, Paul B. Ginsburg, Jon B. Christianson, and Tracy Yee. 2012. "The Growing Power of some Providers
to Win Steep Payment Increases from Insurers Suggests Policy Remedies may be Needed." Health Affairs 31: 973-981,
2012.
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“Blue Cross has this deep and abiding
truce with hospitals – ‘you take what we
give you and we won’t make your life
difficult’”
– Lansing respondent
“[Blue Cross] has the leverage, but we get
double digit price increases...”
– Little Rock provider
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Why the Evidence is Mixed on the Effect
on Prices of Payer Monopsonies
• On the one hand, powerful payers – those with
market shares in the commercially insured market
exceeding 60-70% – have the ability to obtain low
prices through aggressive bargaining with providers
• On the other hand, commercial payers lacking
competition have no need to obtain low prices, only
the “most favorable” ones
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10 Potential Successful Defenses to an
Antitrust Challenge to Provider Consolidation
• From Robert Leibenluft, Esq. –presented at the Catalyst for
Payment Reform Conference on Provider Market Power,
June 11, 2013:
1. No recent merger or acquisition
2.
3.
4.
5.
No horizontal overlap; different product or market
Market is broad and includes sufficient alternatives
Acquired provider is failing
Acquired provider is failing and therefore not a
competitive constraint
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10 Potential Successful Defenses to an
Antitrust Challenge to Provider Consolidation
cont’d
6. Entry is timely, likely and sufficient.
7. Health plans can constrain price increases through
steering/tiering.
8. Transaction is shielded by state action exemption.
9. Convincing evidence that merger will create significant.
10. Health plans, employers, and community leaders are
generally supportive, or at least not opposed.
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The limits of antitrust as the solution to
high and variable provider pricing
• Only a relatively few M & A’s present good antitrust cases
• Pricing power does not derive just from consolidation –
reputation can be a reason and is supposed to be rewarded
in the market
• Does not address the “have-not” providers
• Consolidation has already taken place in many markets
• Forces pushing for consolidation are powerful and unrelated
to pricing power issues
• Some visions of population-based health delivery see
collaboration, rather than competition, as the dominant
paradigm
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“While the antitrust agencies’ efforts to promote and
protect competition in health care markets is
commendable, it is also the case that the antitrust law has
little to say about monopolies legally acquired, or in the
case of consummated mergers, entities that are
impractical to successfully unwind. Given the high level of
concentration in hospital markets and a growing number
of physician specialty markets, it is particularly important
other measures that promote competition.”
– Professor Thomas (Tim) Greaney, Testimony to the Committee of the
Judiciary, House of Representatives, May 18, 2012
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Or Regulatory Approaches Where
There is Clear Market Failure?
In short, it is not clear that there are
self-correcting mechanisms to address
the existing problem of IDNs and other
ACO-like entities exercising market
power over prices
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Will ACOs Help the Pricing Power
Situation or Make it Worse?
• California has long featured ACO-like organizations,
suggesting that greater efficiency and pricing power can coexist
• Risk-taking, although an antitrust safe harbor for
collaborations among competitors (technically, a shift from a
per se violation to rule-of-reason analysis) does not assure
entities will not exercise market power
• Need to discuss if different concerns based on a) whether
hospital- vs physician-based ACOs and b) the specific
payment model adopted
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Challenges to the Vision of Actively
Competing ACOs
• Established MSGPs and IDNs are often provider
network “must haves” in many areas, making
narrow or tiered networks problematic
• CMS approval of an ACO produces a greater lift for
the antitrust enforcement to challenge a particular
entity on grounds of monopolization
• Some geographic areas can’t readily support
competing ACOs – and there are major barriers to
entry
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Challenges to the Vision of Actively
Competing ACOs (cont.)
• Some think large size is inevitable – Big Medicine –
in vertically integration – capital, economies of size
and scope, physicians seek employment, etc.
• Physician ACOs may lack capital, management,
will, and may face hospital obstruction
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The Form of Risk Payment Can Make a
Large Difference on ACO Pricing Power
• Prevailing shared savings formulation, even with two-sided
risk, rewards entities that have exercised pricing power, by
basing target spending on historical spending trended
forward, yet is broadly viewed as more practical and
achievable for getting started than capitation or similar
approaches using normative or community-wide rates
• Seems a logical approach from a payer’s perspective – “no
savings, no sharing”
• Yet, it perversely rewards the inefficient and penalizes the
efficient – and accepts baseline pricing variations
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The Form of Risk Payment Can Make a Large
Difference on ACO Pricing Power (cont.)
• Approaches based on normative/community-rate based
spending, rather than provider-specific, e.g., global
capitation, percentage of premium, would be costly to payers
when provider participation is voluntary – so they usually
now opt for shared savings.
• Capitation that is built on actuarial determination of
community-wide “total cost of care” or a competitively
determined premium or equivalent would have an intrinsic
incentive for providers to moderate their exercise of pricing
power since it would be self-defeating – much more so than
under shared savings, which accepts the baseline prices
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Implications for Payment Policy
• There is need for more nuanced payment policy that at least
partly mitigates the inequities inherent in shared savings and
provides some protection against the preservation of bakedin pricing power – that is, it is not only about bending the
curve on spending at the individual provider level
• For example, a blend of normative and historical spending
targets which over time migrate more to normative or
community rate-based (recognizing some of the input price
variations and social goods that are built into Medicare
payments). Or a different share of savings depending on
base payment levels. See, for example, varying benchmarks
in Medicare Advantage that recognize base spending
differences across geographic areas
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Implications for Medicare’s Role in
Payment Policy to Affect Private Markets
• CMS can adopt performance metrics for the
Medicare ACOs that recognize that costs to nonpublic payers is an inherent component of
performance – to benefit Medicare payment levels
as well as for the community and non-Medicare
consumers. Especially pmpm analysis.
• But private payers must be willing to share data –
which apparently has not been forthcoming
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Possible Approaches to Address
Provider Market Power
On a continuum from market-oriented to regulatory approaches
• Promote market entry of competitors through
liberalized scope of practice laws, specialty
hospitals, telemedicine, repeal of CON laws, etc.
• Increase patient cost-sharing to make them more
price sensitive
• Price transparency with consumer education
• Reference pricing
• Greater reliance on narrow/tiered networks
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Midway between Competition and
Traditional Price Regulation
• Reinvigorated antitrust enforcement, to address proposed
M&As and extant oligopolies
 the latter would almost always require so-called conduct remedies,
such as binding arbitration when payer-provider disputes arise
• State-based regulation of plan-provider contract provisions:




prohibit gag clauses (which prohibit disclosure of prices)
prohibit “most favored nations” clauses
prohibit “anti-tiering” clauses
prohibit “all or none” contracting
• Certificates of Public Advantage – State Action Immunity
from antitrust to target regulation to particular entities
• Payment reform based around capitation/percentage-ofpremium approaches which penalize high prices
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More Traditional Government
Activity/Regulatory Approaches
• Spotlighting/jawboning/self-regulation/cost targets
• Limit health plan premium increases, indirectly
pressuring provider prices
• Place upper (and lower?) limits (e.g., % above
Medicare) on permissible negotiated rates
• State regulation of hospital rates for commercial
insurance products – WV
• State-based all-payer hospital rate setting – MD
(which is moving to hospital global budgets)
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Some Useful Papers and Reports
Addressing Pricing Power
•
Massachusetts Attorney General. Investigation of Health Care Cost Trends and Cost
Drivers. Preliminary Report, Office of Attorney General Martha Coakley, Jan 29, 2010.
•
Berenson, Ginsburg, and Kemper. “Unchecked Provider Clout in California Foreshadows
Challenges to Health Reform,” Health Affairs, 29:2010, 2010
•
Office of the Health Insurance Commissioner State of Rhode Island. Variations in Hospital
Payment Rates by Commercial Insurers in Rhode Island. Jan. 2010
•
Vogt and Town. How Has Hospital Consolidation Affected the Price and Quality of Hospital
Care? Research Synthesis Report 9, RWJF, 2006, updated 2012.
•
Catalyst for Payment Reform (Murray and Delbanco). Provider Market Power in the U.S.
Health Care Industry: Assessing its Impact and Looking Ahead, 2012
•
Berenson et al. “The Growing Power of Some Providers to Win Steep Payment Increases
From Insurers Suggests Policy Remedies May Be Needed” Health Affairs, 31:973, 2012
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