A reality check on hospital mergers

Hospitals represent the largest chunk of U.S. health care spending, and hospitals are acquiring more market power and commanding higher prices — bills that every American pays for in some part.

A report funded by the American Hospital Association claims hospital mergers result in better care and savings for patients. But all independent studies show the exact opposite: hospital mergers lead to less competition and higher prices.

  • One of the most comprehensive studies, which was published last year and is based on commercial insurance claims data, found that hospitals with little competition command higher prices and more favorable contractual terms.
  • Harvard health study showed that Hospital systems in different metro areas also raise prices when they combine.
  • Research from the University of Pennsylvania shows that merging systems don’t save money on routine items like supplies and devices.
  • Large hospital systems operate more like publicly traded companies than tax-exempt charities.

Not all hospital mergers are inherently bad, but consolidation is not the same thing as integration. This sort of consolidation is raising prices and driving up health care costs.

In Addition, the hospital industry is consolidating rapidly, and smaller hospital deals are just as important as large system mergers. Local market power is paramount in health care given that people get most of their care close to home. A combined entity reduces competition, which could give it the upper hand in negotiations with commercial health insurers in its area.

The number of hospital mergers and acquisitions in the first half of 2019 featured deals with big players and plenty of smaller transactions too:

  • Louisiana: Ochsner Health System took over Lafayette General Health, to consolidate a 7-hospital system with annual revenues of over $750M.
  • Lehigh Valley Health Network in Pennsylvania acquired Coordinated Health – a local network in the same Lehigh Valley – despite the $12.5 million its current CEO paid the Department of Justice to settle fraudulently overcharged claims for orthopedic surgeries.
  • Anne Arundel Medical Center merged with Doctors Community Health System in Maryland, creating a system with $1 billion in annual revenue.
  • HCA Healthcare is negotiating the acquisition of a community hospital that would bulk up its presence in Savannah, Georgia.

Hospitals contend their deals are about improving patient care but is mostly about the financial benefits of their enhanced negotiating power. When hospitals in communities combine, commercial insurers will have a harder time excluding any one of them from their networks, even if a hospital has poorer quality or higher prices. This is commonly called “all-or-none” contracting, and it’s been cited in the pending Sutter Health case.

State and federal antitrust officials also have fewer resources to investigate these kinds of regional deals, making it easier for those with antitrust issues to go forward.

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