Effects of Provider Consolidation in
Healthcare: The Latest Research
Seth Freedman
Assistant Professor, IU SPEA
November 21, 2014
Recent Trends in Consolidation
• New wave of hospital mergers
− 50-60 per year during 2000s
− 90-100 per year since 2011
• ~15% increase in # of hospitals in
systems since 2002
• Increasing prevalence of hospital owned
physician practices
Seth Freedman, IU SPEA
April 9, 2015
Outline
• Recent trends in consolidation
• Conceptual effects of consolidation
• Empirical evidence of effects
• Some implications moving forward
Seth Freedman, IU SPEA
April 9, 2015
Effects of Consolidation on:
1. Provider Costs
2. Price
3. Quality
4. “Medical Arms Race”
Seth Freedman, IU SPEA
April 9, 2015
Varying Types of Consolidation
Mergers
System
acquisitions
Physician
Integration
Merging
ownership only
Systems with
local presence
Physicians joining
large group
practices
National systems
with no local
presence
Hospital/hospital
systems
purchasing
physician
practices
Merging
operations
Seth Freedman, IU SPEA
April 9, 2015
Focus of Today’s Talk
• Hospital market competition and mergers
− Most well developed research area
• Two main types of studies
− Comparing more and less competitive
markets
− Before and after studies of mergers
Seth Freedman, IU SPEA
April 9, 2015
Focus of Today’s Talk
• Will mention some early work on
− System acquisitions
− Hospital/physician integration
Important areas for future research
Seth Freedman, IU SPEA
April 9, 2015
RECENT TRENDS IN
PROVIDER CONSOLIDATION
Seth Freedman, IU SPEA
April 9, 2015
Chart 2.9: Announced Hospital Mergers and Acquisitions, 1998 – 2013
(1)
Source: Irving Levin Associates, Inc., The Health Care Acquisition Report, Twentieth Edition, 2014.
(1)
In 2006, the privatization of HCA, Inc. affected 176 acute-care hospitals. The acquisition was the largest health care
transaction ever announced.
Chart 2.4: Number of Hospitals in Health Systems,(1) 2002 – 2012
3,200
3,100
Hospitals
3,000
2,900
2,800
2,700
2,600
2,500
2,400
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Source: Avalere Health analysis of American Hospital Association Annual Survey data, 2012, for community hospitals.
(1)
Hospitals that are part of a corporate body that may own and/or manage health provider facilities or
health-related subsidiaries, as well as non-health-related facilities including freestanding and/or subsidiary
corporations.
medec.com/medicinemonopoly
Seth Freedman, IU SPEA
April 9, 2015
CONCEPTUAL EFFECTS OF
CONSOLIDATION
Seth Freedman, IU SPEA
April 9, 2015
Conceptual Effects
• Typical antitrust concerns: lack of
competition increases prices
• The health care sector is different!
Patients
Insurers
Seth Freedman, IU SPEA
Providers
April 9, 2015
Consolidation and Cost
•
•
•
•
Economies of scale
Facilitate investment in EMRs
Improved access to capital
Eliminating duplicative services or excess
capacity
• Effects likely to depend on extent to
which merging hospitals combine
facilities or not
Seth Freedman, IU SPEA
April 9, 2015
Consolidation and Prices
Insurer
Bargaining
Power
Provider
Bargaining
Power
Seth Freedman, IU SPEA
April 9, 2015
Consolidation and Prices
Increased provider bargaining
power
Increased prices paid by
insurers to providers
Increased premiums, lower
benefits, and/or lower wages for
consumers
Seth Freedman, IU SPEA
April 9, 2015
Consolidation and Quality
Gov. Determined
Prices (e.g.
Medicare)
Seth Freedman, IU SPEA
Market Determined
Prices (e.g. Private
Insurance)
Can’t compete
for patients
through prices
Can compete
for patients
through prices
or quality
Level of
competition
likely to raise
quality
Quality effects
ambiguous
April 9, 2015
Adding MCOs
Compete by
enhancing
attractiveness
to MCO
Lower treatment
costs
More
competition
quality
Seth Freedman, IU SPEA
More
competition
quality
Attract more
patients
More
competition
quality
April 9, 2015
Medical Arms Race
• True clinical “quality” is difficult for
patients to observe
• Hospitals may compete by investing in
flashy things that attract patients, but may
not improve care
− Amenities
− Medical technology with little or
uncertain benefit
Seth Freedman, IU SPEA
April 9, 2015
EMPIRICAL EVIDENCE
Seth Freedman, IU SPEA
April 9, 2015
Challenges to empirical research
• Lag time to obtaining data
• Defining markets
− Arbitrary geographic classifications
− Patient flows
• Measuring actual transaction prices
• Hospitals sell many “products”
• Correlation vs. causation
Seth Freedman, IU SPEA
April 9, 2015
Correlation vs. Causation
Seth Freedman, IU SPEA
April 9, 2015
Provider Costs
• Some evidence of general economies of
scale in hospitals
• Few direct studies of consolidation on
costs
Seth Freedman, IU SPEA
April 9, 2015
Provider Costs
• One high-quality, direct study: Dranove
and Lindrooth (2003)
− Studied 122 mergers between 1989
and 1996
• 81 of these mergers combine licenses
− Find 14% cost savings in licensecombining mergers
− No savings in others
Seth Freedman, IU SPEA
April 9, 2015
Prices
• One of the most well developed areas of
research
• Consistent evidence that level of market
concentration raises prices
− Much early evidence from CA
− Newer work examines FL, MA, and
full US
− Must studies based on data through
mid-2000s
Seth Freedman, IU SPEA
April 9, 2015
Prices
Seth Freedman, IU SPEA
April 9, 2015
Prices
• Consistent evidence that mergers raise
prices
• Variety of methods to ensure appropriate
“control” hospitals
Seth Freedman, IU SPEA
April 9, 2015
Prices Example: Dafny (2009)
• Do hospitals raise prices when rivals
merge?
• Leverages “co-located” rivals
Seth Freedman, IU SPEA
April 9, 2015
Prices Example: Dafny (2009)
• Find that mergers lead to 40% higher
prices
• National coverage
• Most “event studies” find effects upwards
of 20%, especially when markets are
already relatively concentrated
Seth Freedman, IU SPEA
April 9, 2015
Quality
• Large literature on effects of competition on
quality under both pricing schemes
• Administered pricing
− Older studies on Medicare find
competition improves quality
− Newer studies of GB policy change find
consistent results
• Market-based pricing
− Results mixed, but lean towards quality
improving with more competition
Seth Freedman, IU SPEA
April 9, 2015
Quality
• Much of this literature based on mortality
outcomes
• Especially AMI patients
• May be incomplete picture of overall
“quality”
Seth Freedman, IU SPEA
April 9, 2015
Medical Arms Race
• Little direct research on the MAR hypothesis
• Some indirect evidence from pre-1991
− Kessler & McLellan (2000): “Is Hospital
Competition Socially Wasteful?”
− Competition increased costs without
clear impacts on health outcomes for
elderly heart disease patients
− After 1991, competition unambiguously
beneficial
Seth Freedman, IU SPEA
April 9, 2015
Medical Arms Race
• “the medical arms race is slowed by insurers
with market power in markets with sufficient
competition among hospitals. As hospitals
continue to consolidate and integrate with
other providers (e.g., as encouraged by the
ACO movement), I wonder if the medical
arms race will return.”
~Austin Frakt,
http://theincidentaleconomist.com/wordpress/th
e-medical-arms-race/
Seth Freedman, IU SPEA
April 9, 2015
Medical Arms Race
• Some evidence patients value “amenities”
• Goldman & Romley (2008): “Hospitals as
Hotels”
− Medicare pneumonia patients in LA
value amenities
− Patients actually more responsive to
amenities than clinical quality in
choosing hospital
• Need more direct evidence on competition
and tech/amenities investment
Seth Freedman, IU SPEA
April 9, 2015
Physician Integration
• Major data limitations
• Researchers currently working on
competition in physician markets
− Preliminary evidence: consolidation of
physician offices raises prices
• Also evidence that physician/hospital
integration raises prices
• Need to know more about quality
outcomes!
Seth Freedman, IU SPEA
April 9, 2015
Effect Of Hospital Integration And Market Competitiveness On Hospital Prices.
Baker L C et al. Health Aff 2014;33:756-763
©2014 by Project HOPE - The People-to-People Health Foundation, Inc.
Hospital Systems
• Hospitals in multi-hospital systems increased
prices more between 1999 and 2003
(Melnick & Keller 2007)
− 34% more for large systems
− 17% more for small systems
− Results not confined to hospitals with
other system members in local market
− Suggestive of important bargaining
power
Seth Freedman, IU SPEA
April 9, 2015
Hospital Systems & Physician
Integration
• Know very little about other potential
effects
− Efficiency
− Financial stability
− Care coordination
− Quality
Seth Freedman, IU SPEA
April 9, 2015
Summary of Research Findings:
Effects of consolidation
Costs
Prices
Quality
MAR
Potential for
cost savings
Generally price
increases
Generally
quality
decreases
Indirect
evidence of
MAR when
insurers were
weaker
Especially
when services
consolidated
Mergers in
concentrated
markets
increase prices
by >20%
Results more
mixed when
prices market
determined
Could become
important
again
Seth Freedman, IU SPEA
April 9, 2015
Implications Moving Forward
• Much of our knowledge based on 1990s
merger wave
• Will consolidation continue to accelerate?
• Will current mergers and acquisitions
have similar or different effects?
Seth Freedman, IU SPEA
April 9, 2015
ACOs, Physician Integration, and
Multi-Hospital Systems
• New models of care delivery becoming
increasingly important
• Clear scope for price effects
• How will this be balanced with potential
benefits?
• How will regulators respond? Balancing
act between FTC and ACA
Seth Freedman, IU SPEA
April 9, 2015