Provider Consolidation
Trends and Potential Implications of Increased
Provider Concentration of
Market Power for Cost and Quality
Robert Murray, Global Health Payment, LLC
Massachusetts Association of Health Plans
Annual Health Policy Conference
November 15, 2013
RMurray@GlobalHealthPayment.Com
1
Topics to Cover
• Catalyst for Payment Reform (CPR)– Background & Study
• Two Phases of Provider Consolidation
• Findings: No surprise - Consolidation highly correlated with
Price increases
• Recent trends mask underlying implications of consolidation
• Prices are still the primary drivers of health care cost growth
• Profound economic and social implications if it continues
• Possible solutions
• Final Thoughts
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Paper Commissioned by Catalyst for Payment Reform (CPR)
Co-Author Suzanne Delbanco:
•
CPR formed in 2009
•
Independent non-profit led
by health care purchasers
•
Identifying & coordinating
workable solutions to
improve how we pay for
health care
•
Mission to accelerate
reforms to promote the
IOM’s 6 aims
•
Creating a national
framework for payment
reform along with tools that
catalyze change & align
public/private strategies
http://www.catalyzepaymentreform.org/uploads/Market_Power_Paper.pdf
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Background and Professional Interest in this Topic
• Currently a health care consultant – assisting State Governments,
hospitals and private insurers in developing population-based and
shared savings arrangements
• Focus on the development of Global Budgets for hospitals and
employed physicians
• Also assisting the Chinese MoH in their consideration of
prospective payment approaches (DRGs/Global Budgets)
• Professionally – always had an interest in the issue of
consolidation and provider pricing
• Executive Director of the Maryland Health Services Cost Review
Hospital Rate Commission for 17 years – monitored from afar
RMurray@GlobalHealthPayment.Com
4
Watching US hospital Charges with “shock and awe”
Hospitals nationally
Mark up their charges
200% above cost
US
MD
Source: American Hospital Association statistics 1980 - 2009
MD Hospital Markups
Are the lowest in the
Nation by far
5
Two Phases of Hospital Consolidation
• First phase 1990s – early 2000 period
• Literature assessing impacts of this phase available in the late 1990s
and early 2000s
• Consolidation measured by use of a statistical measure (HerfindahlHirshmann Index “HHI”)
• Sum of squared market shares
• Increases as markets more concentrated among a small number of firms
• Reaches Max value of 10,000 when monopoly has 100% share
FTC/DOJ threshold
For a “highly concentrated”
Market is an HIIs > 2500
By 1997, Major MSAs
were well above 2500
From M. Gaynor, Testimony before House Ways and Means, September 9, 2011 (source data AHA) for MSAs > 3 million population
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Tracking the First Phase of Provider Consolidation
Phase I may have been response to the
Growth of “Managed Care” 1995 – 2002
FTC considers a HHI to be “highly concentrated”
RWJF: Health Care Synthesis Report: How has consolidation affected the price and quality of health care William Vogt and Robert Town, 2006
7
By 2009 – Most Markets “Highly Concentrated”
Taken from Capps and Dranove 2011. AHIP Presentation (Bates-White)
8
Some variation but Most MSAs are Concentrated
10% of MSA
Had only One
Dominant
Health System
Taken from Capps and Dranove 2011. AHIP Presentation (Bates-White)
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Consolidation Trends 1990 - 2006
Particularly striking
Is the number of moderately
Concentrated MSAs in
1990 that became “highly”
concentrated by 2006
In 1990, this MSA
Had an HII of 2200
But in 2006 its
HII was 8000
Shows MSAs by HII score
In 1990 and same MSA in 2006
(1) While MSAs are highly
Concentrated, there is wide variation
(2) Most MSAs in 2006 were Highly
Concentrated (250 of the 332) > 2500
(3) Increase in concentration is
a broad
phenomenon
Consolidation Trends: change in HHIs 1990 vs. 2006. Taken from Gaynor M. 2011. Testimonyclearly
before House
Subcommittee
on Health.
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Reasons Associated with this First Phase of Consolidation
• Most common reason (anecdotal and supported by some literature) links
to the rise of managed care 1990s
• Natural economic response by hospitals to more aggressive negotiating
ability of health plans with credible threats to shift volume
HMO Penetration
MSA Hospital
Mergers
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Framing the Problem
• Why do we care?: Per capita health care spending has been twice that of
most OECD countries; 18% of GDP; unsustainable growth, yada yada
• Some realizations Early 2000s – growing evidence that Unit Prices were a
major factor differentiating the U.S. from other OECD countries
Health Affairs Journal
May/June 2003
• Trend in Health Care charges and pricing correlated with increases in
Provider Consolidation (over 1,000 mergers since the mid 90s) M. Gaynor
• Hospital mergers have led to price increase of 3.5 – 53%
M. Gaynor
• Higher prices lead to higher insurance premiums and excess cost growth
• Anti-trust activity has failed to curtail consolidation (string of cases lost)
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It’s the Prices!
What Accounts for the Difference between U.S. and German Spending on Health Care
Offset each other
It’s the Prices
McKinsey Global Institute: Decomposition of spending Germany vs. U.S. (taken from Reinhardt U.E. 2012. Journal of Economics)
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Literature on the Impact of Consolidation (1990-2006)
• Overwhelming evidence consolidation drives up health care
expenditures (numerous studies)
• Also finding that consolidation contributes to wide variation in pricing
both across markets and with in markets
• Some evidence consolidation results in improved provider efficiency
No evidence increased efficiency passed on to consumers
• Evidence that consolidation has either a neutral or negative on quality
For some diagnoses, consolidation found to reduce quality
• In theory, consolidation (particularly between hospitals and physicians)
can result in improved clinical integration
Research on physician-hospital consolidation doesn’t support this conclusion
• It appears, consolidation is not for better care management it is to
enhance Market Power under a predominant FFS system
14
Considerable FTC/DOJ Activity in 1990s - 2000
• High and growing levels of concentration resulted in FTC anti-trust
action during this period (many successes in 80s and early 90s)
• Anti-trust activity can often “draw a line in the sand” with
successful individual cases and forestall additional merger activity
• Unfortunately the FTC experienced a string of high profile losses in
the 1990s and into the next decade (1993-1998)
• Failure of anti-trust really represented the failure of the Judiciary
– that believed that non-profit hospitals would behave differently
• Evidence shows that non-profit firms (despite community
participation on boards) pursue aggressive anti-competitive tactics
15
Phase II: Factors Driving Consolidation
• Uncertainty about the direction of health care reform - many taking
advantage of the lack of ACO monitoring and oversight
• Respond to calls for coordinated and integrated care (although again research doesn’t indicate much improvement here historically)
• Future market dynamics seem daunting to smaller hospitals and
physician practices
• Stand-alone hospitals lost profitability during recession and were
offering themselves up to larger chains
• Again, a primary driver: attempt to obtain increased negotiating
leverage/revenue
• More recently – mergers directed at increasing referrals to tertiary
facilities from community hospitals and through acquired physician
practices and forestalling other competitive threats
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Other Factors and Tactics Help Drive up Prices
• Must “Have Hospitals” and “Must Have” specialty services
• So-called “Tying” of services & anti-competitive clauses in contracts
• Multi-hospital systems over large regions (avoid anti-trust scrutiny) but
able to negotiate broad price increases for all facilities
• Relative geographic isolation – particularly in large spread-out geographic
areas (Phoenix, AZ)
• Acquisition of physician practices by hospitals – to increase negotiating
leverage for both groups, forestall possible competition by physicianorganizations and generate additional “facility fees”
• These factors tend to be “mutually reinforcing and present, from a health
plan perspective, a daunting challenge”
• Yet Health Plans often don’t push back, looking to be “just better than the
Competition.”
Seeing “Most Favored Nation” clauses in contracts
Berenson, et al. Health Affairs May 2012
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Second Phase Appears to be Occurring since 2009
Since 2009, perhaps in response to uncertainty related
to Health Care Reform, safe-harbor protections of the
ACA and low cost of capital and distressed standalone
hospitals – consolidation is now in a second Phase
Source: New York Times September 2013
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And Yet, Health Care Costs are Finally Under Control! (really?)
• “Growth in U.S. health spending was slow in 2010 at 3.9%”
• US health spending growth in 2009 - 2011 were the lowest in the
51-year history of tracking National Health Expenditures
Centers for Medicare and Medicaid Services, January 9, 2012
• “the tectonic plates underlying the health system are beginning to
shift in anticipation of new incentives under health reform”
Karen Davis, Commonwealth Fund, January 18, 2012
• The Wall Street Journal: The Myth of Runaway Health Spending
“The moderation has been driven by cumulative improvements in
medical care and by insurers, and by marketplace disciplines on the
demand for medical care. Consumers are finally getting more involved
in managing and paying for their own care.”
J.D. Klein, American Enterprise Institute, February 17, 2012
• Slower cost growth could be due to economic factors and high
deductibles yet, Medicare is also experiencing slower growth
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Need a Longer-Term Perspective on Health Costs
• National Health Expenditures (NHE) = GDP +2% “excess cost growth”
• Trend line for NHE appears to be declining
But so is GDP Trend line
• We haven’t reduced “Excess cost growth” and prices are primary driver
Excess Cost
Growth still
Appears to be
1.5 to 2.5%
Source: CMS Office of the Actuary 2012 & U. Reinhardt Economix Blog - The New York Times
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Evidence shows Expenditures track Economic Cycle
• Victor Fuchs and other economists are skeptical as to whether recent trends
represent a long term structural shift in health care
• Analysis that adjusts GDP growth for the historical gap between GDP growth and
Health Expenditure growth – shows there is a strong correlation between how
fast Health Expenditures grow and the economic cycle
Except during the
Managed Care Era
Adjusted
GDP Growth
(+2.4%)
National Health
Expenditures
Kinda looks like a correlation to me !
Source: NEJM,
Victor Fuchs September 2013
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Two Data Points don’t Indicate a Long Term Trend
• Historically, two year trends aren’t good predictors of long term growth
Source: NEJM,
Victor Fuchs September 2013
There is actually a
negative correlation
between the 2-year
trend and long term
20 year that
followed
• And, the fundamentals of health care that drive up costs are still in place:
• Prevalence of Fee-for-Service payment arrangements
• Fixed-rate payment systems that pay providers marginal revenues > marginal costs
and provide strong incentives to increase service volumes
• Fragmented and conflicting payment structures and incentives
• Highly consolidated provider industry (and getting more so) that has tremendous
pricing power vs. private payers
• Disengaged business community that doesn’t hold private insurers accountable
• Insufficient Anti-trust review and oversight of contracting process
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Sad History of Health Reform in One Chart
• Tempting to view more recent favorable trends as a sign we’ve
“broken the back of the health care cost monster”
• But we’ve seen this dynamic before “no approach our nation has
tried to control costs has had a lasting impact” – Drew Altman
1965 enactment
Medicare/Medicaid
“Voluntary”
Effort vs. Carter
All-Payer Proposal
Wage/Price
Controls
Medicare
IPPS
Managed
Care
Or Too soon to break
out the Champagne
and celebrate?
Broken
The Back
Of the Health
Care Inflation
Monster?
Point: Policy-makers shouldn’t get lulled into a sense of complacency
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It’s Still “the Prices Stupid” – at least for now
• During this period of slower growth in health expenditures, prices are
the main contributor to increases in cost and insurance premiums
• Also, emerging evidence that in addition to causing a one-time increase
in market prices in a particular area increased concentration appears to
have a long term upward influence on long-term growth trends
• Retrospective studies also show that mergers in already highly
concentrated markets generally lead to significant price increases (RWJF
synthesis study 2012)
• Recent estimate from Price-Waterhouse that hospital prices will increase
at 8.3% for 2013 much more than in any other sector of the health care
industry
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Despite Slowing of Health Care Cost Growth – Prices are
still Primary Drivers
Massachusetts Spending Growth by CostDriver Category (2007-2008 and 2008-2009)
“prices to explain nearly all of the
increase in expenditures”
Schoenman, J.A., N. Chockley. 2012. Understanding
U.S. Health Care Spending. National Institute for
Health Care Management (NICHM) Webinar. February
2, 2012. Available from:
Factors Accounting for Growth in
Personal Health Care Spending, 19802009
Their analysis showed that “prices
accounted for more than 60% of the
increase in overall spending in 2010”
Martin A, Lassman D, Whittle L, Catlin A. Recession
contributes to slowest annual rate of increase in health
spending in five decades. Health Aff (Milbank) 2011;30(1): 1122.
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Hospital Prices increase continue to be Well Above Inflation
Growth in Prices Paid by Private Payer for Hospital Inpatient Care vs. Growth in the
Hospital Market Basket Index 1992-2010
Hospital prices consistently outstripping cost inflation
Does NOT equal a
a Functional Market for hospital services
Sommers AC, White, Ginsburg PB. Addressing hospital pricing leverage through regulation: state rate setting. NIHCR Policy Analysis No. 9, 2012.
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Hospitals Buying up Physician Practices
“Hospitals are trying to wrap themselves in a physician employment
blanket, but the cost per square inch of that blanket is very high.
This is an effort to lock up the game before it even starts (i.e.,
preclude Physician-led ACOs and other market-based approaches,
incentivize docs based on billings and increase negotiating leverage
with payers” Anonymous CEO Major Maryland Hospital System
Taken from Gaynor, Statement before the Committee on Ways and Means, Health Subcommittee. Washington DC. September 9, 2011.
27
Recent Challenge of Hospital-Physician Consolidation
• Hospital acquisition or affiliation with physician groups and
employment – are the most active area of consolidation recently
• There are strong and direct effects on prices
• Hospitals negotiate much higher prices for services of employed physicians
• The generate the addition of a “facility fee”
• Estimated to be costing Medicare in excess of $1 billion per year
• Indications of higher prices as well
• There are obstacles to insurers beyond just prices increases
• Obstacles to insurers’ steering patients to higher value providers
• Discourages the development of physician organizations
• Reduced potential competition in ACO/risk contracting market
28
Implications: For Employees and Consumers
• Employers believe they foot the bill for nearly 60% of individuals
enrolled in employer sponsored insurance plans (21% of spending)
• Tax deductibility of health insurance and other factors hide the fact that
employees and consumers actually foot the bill for increased spending
on health care – through near zero real wage growth, layoffs, increases
in product prices and increased premiums and cost-sharing
• In tight job markets (such as recently) there is an even more profound
impact as employers just resort to increased “cost-sharing” with
employees (High deductible health plans)
• Average person must devote 25% of any new income to funding health
care costs – with continued excess growth this could grow to 50-100% of
any new income (Chernew &Baicker NEJM 2010)
29
Implications for the Economy
• Spending 18%+ of GDP crowds out needed investment in infrastructure,
education and defense (hospital spending > Social Security and Defense
spending now)
• “We don’t have an overall spending problem in the U.S. We have a
humongous health spending problem” (Blinder, Wall Street Journal 2011)
• If health care costs continue to increase 1-2% above GDP – limited options
for funding this and huge trade-offs in funding other programs
• “This collision [between increased spending and inability to raise taxes]
cannot be avoided by borrowing. U.S. currently at 70-75% Debt to GDP
• Health care spending also a significant drag on long-term economic growth
because it may help drive interest rates much higher
• Real concern is we have no more “economic space” to weather another
financial crisis (and we’ve had two in the past 12 years)
30
Other Objectionable Effects of Health Care Monopolies
• Per Economic theory, Monopolies are suboptimal because they charge
higher than competitively established prices and when the prices get too
high consumers “forego” purchasing the monopoly good (negative
welfare)
• These output reducing effects are greatly lessened in health care
markets because of the presence of U.S. Style Health Insurance
• Insured Consumers can now more easily pay the monopolist asking
prices rather than being induced to give these services up
• The presence (or expansion) of health insurance is clearly a net positive
for our society, however, health insurance can expand the negative
resource allocation effects of provider monopolies
• This dynamic could create considerable strain on the continuation of
subsidized insurance products B. Richman, Duke University Law School August 2013
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A Word about Political Power of Providers
• Another regressive aspect of Monopolies is the economic harm inflicted
by spending heavily to sustain current monopoly barriers
• Richard Posner and others believe that monopolies’ most serious
misallocative effect is the monopolists’ strenuous efforts to obtain,
defend and extend market power
• Providers in major markets also wield tremendous political power
because they are among the largest employers and source of new jobs
• Arguments of providers being “engines of economic growth” are false
• Recent RAND study quantifies increase in “excess health spending”
results in job losses (121,00 for every 0.1% above GDP growth)
• From these data the author calculated that we sacrifice 1.2 jobs in the
rest of the economy for every job added to the health sector
• At best a “wildly inefficient jobs program” (Baicker & Chandra NEJM)
32
Affordability Concerns and a Possible two-tiered Health System
140%
Payments as a Percentage of Hospital Cost
Private Payer
130%
120%
Middle
Class ?
110%
100%
Medicare
90%
Medicaid(1)
80%
Source: American Hospital Association Chart Book 2011
70%
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
• Real danger that current and planned Government spending cuts may
precipitate further consolidation and higher prices to the private sector
• May lead to a diminishment of access and increasing lack of affordability of
private insurance
• Will the <65 middle class increasingly be left out of the system?
33
CPR Study looked at Three Categories of Potential Solutions
Market-Based
Approaches
Regulatory
Approaches
Coordinated
Public-Private
Approaches
34
Potential Solutions – Many are being tried in Massachusetts
• Better information on Price and Quality for Consumers
• Most opportunities are on Outpatient Procedures/tests
• Inpatient services are generally too complex
• Price transparency can lead to increased prices (suppliers collude)
• Limited and Tiered Networks
• Higher receptivity to narrow network (affordability challenges)
• Exchanges create new opportunities here
• Hospitals can block tiered networks by refusing to contract
• Reference Pricing
• Provides strong incentive for patient to use reference price provider
• Applies mostly to discrete OP procedures so limited impact
35
Potential Solutions (continued)
• Fostering Physician-led Organizations
• Attempts to increase price-sensitivity of physician groups – to create a
“rational purchaser” of better value for patients
• Helps create more competition among hospitals
• Examples in Massachusetts and other States (Maryland PCMH SSP
program)
• Physicians-led shared savings program – but for total cost of care
• Significant potential for savings by shifting site of care (as shown by AQC)
• Government Actions
• Prohibit anti-competitive contracting practices (tying, anti-steering, MFN)
• Price Limits in certain key areas or revert to all-payer rate setting
• Neutron bomb: Force AT&T style divestiture of Larger Health Systems
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Out of Network Price Gouging by Providers
• The problem now is the huge and growing imbalance in negotiating
leverage between providers and insurers
• An answer of how to restore that balance a bit can be found in a recent
MedPac analysis (June Report to Congress 2013)
• Realization that private payer negotiating leverage also weak because of
dominant providers ability to get exorbitant payments for out-ofnetwork patients they see through their ER
• Insurers often presented with an option – either accept my demand for
in-network prices that are 135% of cost now or pay me 300-400% mark
up on prices for the 20-30% of your patients I see through my ED
• This problem is exacerbated as hospitals continue to increase their
charge levels and also as Emergency Rooms are an increasing source of
admissions
37
Faustian Bargain Facing Insurers
•
In a negotiation a hospital can negotiate a contract and be assured of more volume
(both ED volume/elective referral volume), albeit at a lower rate (135 % of cost)
•
Conversely the hospital can remain out-of-network and charge all of the insurer’s
patients admitted through its ED - full charges.
•
The table shows that the revenue it will receive in either scenario is about equal
•
And as a hospital increases its charges from 320 percent to 400 percent of cost the
negotiating leverage shifts even more in its direction, as is shown in column G.
38
Potential Anti-Price Gouging Legislation – Needed Now
• Evidence from MedPac shows that this is NOT the case for Medicare
Advantage plans however – MA plans are able to negotiate rates that
are close to Medicare FFS levels
Amazing! Why would this be?
• This is because MA Plans have a “back-stop” – if they can’t get a
provider to negotiate reasonable rates, the back-stop is the MA plan
pays Medicare FFS rates
• This provides very strong evidence for the need for legislation to set a
limit on out-of-network prices paid – particular for ED cases
• This is being studied in California where this problem is quite significant
– and continues to undermine the negotiating leverage of insurers
• State legislatures should pass a law limiting these out-of-network
“balance billing” strategies to 1.5 x Medicare or less
39
Regulatory Efforts to Tie PMPM growth to GSP
• Massachusetts’ attempt to overtly target GSP growth as the desired
limit on Health Expenditure growth is laudable
• Unfortunately, it is largely a voluntary exercise (i.e. it is not
Enforceable in the way a legislative mandated rate system could
both establish payment incentives for and enforce this result)
• The All-payer rate setting system in Maryland is attempting to do
precisely this
• After years of favorable cost per case growth, but highly unfavorable
growth in hospital service volumes – Maryland is establishing strict
limitations on volume growth and mostly PM PM (global budget)
payment arrangements for most hospitals
• Maryland has proposed an all-payer PMPM limitation for both allpayer and Medicare hospital expenditures (both IP and OP)
40
Proposed Maryland All-Payer Demonstration
• Place all or most hospitals under Global Budget constraints
• Several Years ago we used our rate setting authority to establish
enforceable Global Budgets with 10 rural hospitals and expanded its
Volume limitations – with the idea of expanding over time
• The Commission has now developed a methodology to extend this
approach to other hospitals
• Hospitals that remain under the core DRG-based IP and FFS-based OP
rate system – will much face stricter volume controls in the rate system
• These policy changes in addition to the Commission’s rate setting
authority (applied at the individual hospital level) are designed to limit
total hospital revenue growth to = 3.58% growth per resident per year
over the next 5 years
And it is enforceable
• This system will apply to all-payers (including Medicare) and could have
profound implications for cost containment in the U.S.
41
An Outsiders View of Massachusetts
• As an outsider, recognize that there is much for Massachusetts to
be proud of – many advantages and tremendous insight and
progress
• Massachusetts AG’s report – was the “Gold Standard” for clear, insightful
and courageous analysis on these issues
• The Legislature has taken some very important steps with major provisions
re: price transparency, required use of tiered networks, a system of
performance review and a desired link of TME growth and GSP
• However, the so-called “lower cost health systems” that were
thought to be competitive threat to the big monopolies are now
struggling
• From what I read and hear – affiliations and mergers continue in
the state without much resistance
42
Close with An Observation and a Question
• Indicated earlier – felt a little embarrassed coming to Boston to
purportedly discuss a topic that you already have analyzed and know so
much about
• Massachusetts led the nation in insurance reform and expansion and
also was a leader in analyzing and taking some preliminary steps to
address the very seriously negative implications of Provider
Consolidation in health care
• You have the evidence, you know better than anyone what will happen
Why then in god’s green earth is this merger activity allowed
to continue?
• We don’t have a health care spending problem – we have a
“humungous” Consolidation problem with prodigious implications for
future spending
• Rate Regulation may well be back in vogue in the near future
43