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Hospital Consolidation: Trends, Impacts & Outlook

Cost & Quality / Provider Consolidation

Published on: January 01, 2020. Updated on: November 03, 2020.

In light of the expected continuation of hospital system consolidation, the inadequacy of current antitrust enforcement, and the detrimental impacts arising from the non-competitive exercise of existing market power, numerous experts have in recent years advanced a range of policy solutions both to strengthen antitrust enforcement and improve competition and pricing in hospital markets.a Proponents of stronger antitrust enforcement have called for significant increases in the funding for federal antitrust agencies, including support for research to develop new economic models and evidence reflecting the broader geography of present-day mergers. In a similar vein, with so many hospital mergers now involving non-profit systems, experts call for the FTC authority to be extended to address anti-competitive behavior by non-profit entities. They also recommend looking beyond the price effects of mergers to consider other potential negative outcomes such as stymied innovation, blocked entry of competitors and limited choice of providers. Rather than relying on the current case-by-case adjudication to determine the legality of a limited number of challenged mergers, many have called for the FTC to use its existing rule-making authority to define unfair methods of competition, thereby reducing ambiguity about the legality of proposed mergers. Likewise, increased use of structural presumptions, which identify situations where mergers are presumed illegal based on their impact on market structure, could much more clearly flag and head off problematic mergers. This approach would place the burden of proof on the merging parties to demonstrate merger benefits, rather than on federal authorities to demonstrate the harms from the merger. Finally, most experts want states to discontinue use of COPAs, and some have proposed that the FTC provide technical assistance to state regulators so as to improve state-level antitrust enforcement. A number of strategies have been advanced to counter existing hospital market power. One approach is to prohibit anti-competitive practices when hospitals and insurers are negotiating contracts. Such practices would include anti-tiering and anti-steering clauses that prevent insurers from using tiered or narrow networks or other means to steer patients to a hospital’s competitors; gag clauses and non-disclosure agreements that prevent the price and quality transparency intended to encourage patients to comparison shop for providers; all-or-nothing contracting that forces an insurer to include all members of the hospital system in the network (often in the most favorable tier); data blocking that inhibits sharing of a patient’s clinical information with providers outside of the hospital system; and most favored nation clauses. Observers have also recommended elimination of several types of state laws that stand in the way of competition, including any willing provider laws that prevent insurers from creating value-based provider networks and certificate-of-need laws that restrict entry by new hospitals that could interject more competition into the market. Competition might also be enhanced by encouraging patients to shop for high-value providers using benefit designs such as reference pricing and by providing accessible and meaningful information on provider prices and quality. One caution, however, with price transparency is the danger that lower-price hospitals may raise their prices to meet competitors’ prices or hospitals could use the information to engage in other types of price collusion. Others argue that even with pro-competitive practices such as these, price regulation may still be needed in certain non-competitive markets. One common recommendation is to limit negotiated hospital rates to no more than a pre-determined percentage of Medicare rates, particularly in markets that are highly concentrated. Another proposed way to regulate prices would be to implement all-payer rate setting, in which hospitals receive the same rates from all insurers instead of negotiating separate contracts and rates with individual insurers.

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Citations

Slide 4

Data from Kaufman, Hall & Associates, LLC: “2017 in Review: The Year M&A Shook the Healthcare Landscape.” and “2018 M&A in Review: A New Healthcare Landscape Takes Shape.” The figures reflect all publicly disclosed acquisitions, mergers, joint ventures and joint operating agreements involving acute care hospitals or hospital systems. Not all announced deals were ultimately finalized.

Slide 5

Data from Kaufman, Hall & Associates, LLC. “2018 M&A in Review: A New Healthcare Landscape Takes Shape.”

Slide 10

^a Summary points are drawn from numerous articles reporting individual studies as well as from research syntheses, including the following:

Capps C and Dranove D. “Hospital Consolidation and Negotiated PPO Prices.” Health Affairs, 23(1):175-81, March/April 2004.
Cooper Z, Craig SV, Gaynor M and Van Reenen J. “The Price Ain’t Right? Hospital Prices and Health Spending on the Privately Insured.” Quarterly Journal of Economics, 134(1):51-107, February 2019.
Dafny L. “Estimation and Identification of Merger Effects: An Application to Hospital Mergers.” The Journal of Law and Economics, 52(3):523-50, August 2009.
Gaynor M, Ho K, and Town RJ. “The Industrial Organization of Health Care Markets.” Journal of Economic Literature, 53(2):235-85, June 2015.
Gaynor M and Town R. “Competition in Health Care Markets.” In Pauly MV, McGuire TG, and Barros PP, editors, Handbook of Health Economics, Volume 2, Chapter 9 (2011).
Gaynor M and Town R. “The Impact of Hospital Consolidation – Update.” Robert Wood Johnson Foundation, Update to Research Synthesis Report No. 9, June 2012.
Gaynor M and Vogt WB. “Competition Among Hospitals.” The RAND Journal of Economics, 34(4):764-85, Winter 2003.
Gowrisankaran G, Nevo A, and Town R. “Mergers When Prices Are Negotiated: Evidence from the Hospital Industry.” American Economic Review, 105(1):172-203, January 2015.
Haas-Wilson D and Garmon C. “Hospital Mergers and Competitive Effects: Two Retrospective Analyses.” International Journal of the Economics of Business, 18(1):17-32, February 2011.
Tenn S. ”The Price-Effects of Hospital Mergers: A Case Study of the Sutter-Summit Transaction.” International Journal of the Economics of Business, 18(1):65-82, February 2011.
Thompson A. “The Effect of Hospital Mergers on Inpatient Prices: A Case Study of the New Hanover-Cape Fear Transaction." International Journal of the Economics of Business, 18(1):91-101, February 2011.
Vita MG and Sacher S. “The Competitive Effects of Not-for-Profit Hospital Mergers: A Case Study.” Journal of Industrial Economics, 49(1):63-84, March 2001.
Vogt WB and Town R. “How Has Hospital Consolidation Affected the Price and Quality of Hospital Care?” Robert Wood Johnson Foundation, Research Synthesis Report No. 9, February 2006.

^b Dafny L, Ho K and Lee RS. “The Price Effects of Cross-Market Mergers: Theory and Evidence from the Hospital Industry.” The RAND Journal of Economics, forthcoming.
^c Lewis MS and Pflum KE. “Hospital Systems and Bargaining Power: Evidence from Out-of-Market Acquisitions.” The RAND Journal of Economics, 48(3):579-610, Fall 2017.
^d Schmitt M. “Multimarket Contact in the Hospital Industry.” American Economic Journal: Economic Policy, 10(3):361-87, August 2018.

Slide 11

^a Summary points drawn from numerous articles reporting individual studies as well as from research syntheses, including the following:

Beaulieu ND, Dafny LS, Landon BE, Dalton JB, Kuye I, and McWilliams JM. “Changes in Quality of Care after Hospital Mergers and Acquisitions.” The New England Journal of Medicine, 328(1):51-9. January 2, 2020.
Capps C. “The Quality Effects of Hospital Mergers,” Department of Justice, Economic Analysis Group Discussion Paper 05–6. 2005.
Cooper Z, Gibbons S, Jones S and McGuire A. “Does Hospital Competition Save Lives? Evidence from the English NHS Patient Choice Reforms.” Economic Journal, 121(554):F228-60, August 2011.
Gaynor M, Ho K, and Town R. “The Industrial Organization of Health Care Markets.” Journal of Economic Literature, 53(2):235-85, June 2015.
Gaynor M, Moreno-Serra R, and Propper C. “Death by Market Power: Reform, Competition and Patient Outcomes in the British National Health Service.” American Economic Journal: Economic Policy, 5(4)134-66, November 2013.
Gaynor M and Town R. “The Impact of Hospital Consolidation – Update.” Robert Wood Johnson Foundation, Update to Research Synthesis Report No. 9, June 2012.
Ho V and Hamilton BH. “Hospital Mergers and Acquisitions: Does Market Consolidation Harm Patients?" Journal of Health Economics, 19(5):767-91, September 2000.
Kessler DP and McClellan MB. “Is Hospital Competition Socially Wasteful?” The Quarterly Journal of Economics, 115(2):577-625, May 2000.
Kessler DP and Geppert JJ. “The Effects of Competition on Variation in the Quality and Cost of Medical Care.” Journal of Economics and Management Strategy, 14(3):575-89, July 2005.
Noether M and May S. “Hospital Merger Benefits: Views from Hospital Leaders and Econometric Analysis.” Charles River Associates, January 2017.
Romano PS and Balan DJ. “A Retrospective Analysis of the Clinical Quality Effects of the Acquisition of Highland Park Hospital by Evanston Northwestern Healthcare.” International Journal of the Economics of Business, 18(1):45–64. February 2011.
Short MN and Ho V. “Weighing the Effects of Vertical Integration Versus Market Concentration on Hospital Quality.” Medical Care Research and Review, published online February 9, 2019.
Vogt WB and Town R. “How Has Hospital Consolidation Affected the Price and Quality of Hospital Care?” Robert Wood Johnson Foundation, Research Synthesis Report No. 9, February 2006.

^b Burns LR, McCullough J, Wholey D, et al. “Is the System Really the Solution? Operating Costs in Hospital Systems,” Medical Care Research and Review 72(3):247-72, June 2015.
^c Schmitt M. “Do Hospital Mergers Reduce Costs?” Journal of Health Economics, 52:74-94, March 2017.
^d Noether M and May S. “Hospital Merger Benefits: Views from Hospital Leaders and Econometric Analysis.” Charles River Associates, January 2017.
^e Knapp C, Peterson J, Gundling R, Mulvany C, and Gerhardt W. “Hospital M&A: When Done Well, M&A Can Achieve Valuable Outcomes.” Report from Deloitte and the Health Care Financial Management Association, 2017.
^f Noether M and May S. “Hospital Merger Benefits, A Review and Extension.” Charles River Associates, December 2018.
^gCraig S, Grennan M and Swanson A. "Mergers and Marginal Costs: New Evidence on Hospital Buyer Power." March 27, 2019.^h Dranove D and Lindrooth R. “Hospital Consolidation and Costs: Another Look at the Evidence.” Journal of Health Economics, 22(6):983-97, November 2003.
ⁱ Vogt WB and Town R. “How Has Hospital Consolidation Affected the Price and Quality of Hospital Care?” Robert Wood Johnson Foundation, Research Synthesis Report No. 9, February 2006.

Slide 14

Number of announced consolidations is from Kaufman, Hall & Associates, LLC: “2017 in Review: The Year M&A Shook the Healthcare Landscape” and “2018 M&A in Review: A New Healthcare Landscape Takes Shape.”

FTC case history is from https://www.ftc.gov/enforcemen... 15

^a Seminal studies of cross-market regional mergers include:

Vistnes G and Sarafidis Y. “Cross-Market Hospital Mergers: A Holistic Approach.” Antitrust Law Journal, 79(1):253-91, 2013.
Dafny L, Ho K and Lee RS. “The Price Effects of Cross-Market Mergers: Theory and Evidence from the Hospital Industry.” The RAND Journal of Economics, forthcoming.

Slide 16

^a A framework for studying multimarket contact was developed and tested in Schmitt M. “Multimarket Contact in the Hospital Industry.” American Economic Journal: Economic Policy, 10(3):361-87, August 2018.

Slide 17

Recent analyses of COPAs include: