Bigger Health Systems, Bigger Price Tags

Health systems say getting bigger allows them to adapt to a changing industry. But the mergers may be driving prices higher.

Hospitals and health systems are merging at a breakneck pace. Health systems are growing into regional mega-systems as they gobble up hospitals and clinics.

A record-setting 115 hospital and health system transactions were announced in 2017, according to Kaufman Hall. And another 50 deals were signed in the first half of 2018 alone.

In fact, most urban areas in the U.S. are now dominated by only one to three health systems instead of a market made up of competing hospitals and clinics.

Health systems say getting bigger allows them to adapt to a changing industry. But the mergers may be driving prices ever higher.

What’s driving hospital mergers? 

The move toward value-based care is what hospitals say is driving the mergers. Providers are expected to give patients more coordinated, connected care at all levels. Combining hospitals, doctors and clinics into one system would theoretically make that easier.

[Related: Independent Doctors in a Changing Health Care Landscape]

“There’s no mystery behind the hospital field’s realignment. It is a direct response to the changing needs of communities for more convenient care, continuous financial pressures to reduce its costs and the ever-present drive to improve its quality,” the American Hospital Association said in a 2018 blog post.

Hospital mergers do not generally lead to reduced cost or improved quality.

Hospitals also need money to make investments in new technology. Many may gain access to new capital through a merger.

But there’s little proof that mergers actually improve care or have a positive impact on the price of care.

“We don’t have a ton of evidence in what happens after a merger in terms of increased quality or decreased costs,” says Matthew Grennan, Ph.D., assistant professor of health care management at the Wharton School at the University of Pennsylvania.

Martin Gaynor, professor of economics and public policy at Carnegie Mellon University, put it more bluntly in a 2016 Health Affairs piece: “Hospital mergers do not generally lead to reduced cost or improved quality.”

No savings on supplies

One way hospitals say they may save money from a consolidation is on supplies.

Hospitals negotiate prices with suppliers. This means hospitals pay different prices for the same supplies. “There’s a lot of price variation across hospitals that are buying the exact same thing,” Grennan says.

Hospital leaders say once a merger goes through, the new entity should be able to get the lower negotiated price.

But when Grennan and his colleagues studied the savings actually achieved, they didn’t find much. They expected to see about 10 percent savings on supplies after a merger, but hospitals achieved just 1.5 percent savings in the two and a half years after a merger.

“We were pretty surprised by how low the achieved cost savings were,” Grennan says.

And even if hospitals were to save on supplies, there’s no telling if patients would see savings trickle down to them.

Less competition means higher prices

Not only do mergers not result in savings on supplies, they actually lead to higher prices. Many studies show that concentrated hospital markets have higher prices.

In fact, prices increase 20 percent or more after competing hospitals merge, a Robert Wood Johnson Foundation report found.

That’s in part because insurers are usually left with less negotiating power.

Amy Suter Hill, divisional vice president of network management with Blue Cross and Blue Shield of Texas, has experienced this firsthand. “Consolidation [in North Texas] is rampant,” she says. Systems that used to compete with each other for patients and on prices have merged to create mega-systems.

“Their goal is to gain the strongest foothold in the market to force their agenda, which includes better rates from health plans,” she says.

Contract negotiations with large health systems may be intense, sometimes unfortunately generating alarming media coverage as deadlines approach. Suter Hill and her team do what they can to prepare for negotiations and reach a fair deal for the plan’s members.

“Our main goal during a negotiation is to protect our members and clients from excessive health care costs.”

In addition to negotiating rates, insurers are working hard to expand contracts with health systems that include financial incentives for quality, cost-effective care.

Embracing value-based care options may help these large health systems fulfill their commitments to providing more effective, efficient care.

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