When Healthcare Providers Consolidate, Medical Bills Rise

In theory, this could drive down prices. After all, overhead might be lower if these groups consolidate, say, billing or records departments. Or the now-larger group might be able to negotiate lower prices on medical supplies.

But that is not what is actually happening, according to new research from the Kellogg School. Instead, prices have climbed as more and more healthcare providers have gained market power through mergers and acquisitions. And not much can be done about this.

While the consolidations create powerful healthcare conglomerates in many communities, the piecemeal nature of individual acquisition deals makes them unlikely to attract the attention of antitrust regulators, the research finds. It is only after multiple deals are done that the impact on pricing is felt—and by then, regulators are unlikely to step in.

These are the takeaways from two pieces of recent research conducted by David Dranove, a Kellogg professor of strategy, Christopher Ody, a research assistant professor of strategy at Kellogg, and Cory Capps of Bates White Economic Consulting.

“Integration is a well-known trend” among healthcare providers, Dranove says, “and hospitals often claim it will drive cost savings. But that’s difficult to document. So we thought we could look at prices to find out what’s really going on.”

Analyzing Healthcare Mergers and Acquisitions

One challenge facing researchers interested in the topic is availability of good data.

“You need data that allows you to identify which physicians were acquired by which hospital and how much the same physicians charged for the same services before and after the acquisition,” Dranove says. “That’s not always easy to get.”

Luckily, the researchers were able to get access to insurance-company data. The claims data covered about 12 percent of the US population.

“They gave it to us no strings attached,” Dranove says. “They were interested in our findings on pricing no matter which way it went.”

The researchers found that from 2007 to 2013, almost 10 percent of physician practices in the data were acquired by a hospital. Once acquired, prices for the services provided by those physicians rose an average of 14 percent.

“The rising prices are partly due to ‘mechanical elements’ of how prices are set in contracts,” with insurers, Dranove says. For example, insurers often write contracts that allow hospitals to bill more for a procedure than a physician group can. Additionally, Dranove says, “when a hospital owns a physician practice, they gain market power.”

Dranove notes that Medicare is taking initial steps to address the issue of higher post-acquisition prices—for example, preventing hospital-acquired physician groups that are not located at the hospital campus from billing like a hospital—and that private insurers will likely follow suit, to the extent that they can.

Do Healthcare Mergers Create Uncompetitive Markets?

Are there other impacts of these consolidations? Do these healthcare mergers and acquisitions give hospitals or large practitioner groups too much power within individual markets? And, if so, how likely are they to attract antitrust scrutiny by the US Department of Justice or Federal Trade Commission?

The researchers addressed these questions in a separate study.

“We wanted to document the rise of concentration in physician markets, then put our antitrust eye on it,” Dranove says.

The government considers physician markets uncompetitive if they have a high level of concentration, meaning a small number of healthcare providers delivers a large share of the healthcare in a specific community.

But regulators only scrutinize consolidation when a single proposed merger is seen as large enough to attract attention based on how consolidated the market will become if it goes through. That means that a number of mergers and acquisitions, which are small enough not to attract government attention, can eventually create a healthcare behemoth that makes a market uncompetitive.

This is what the researchers found often happened.

Using the same insurance-claims data in 1,117 physician markets, they found that a full 22 percent of markets meet federal guidelines for uncompetitive. But only 28 percent of these high-concentration markets had an individual acquisition that would have been viewed as anticompetitive by federal authorities.

“It turns out the explanation is very simple,” Dranove says. “The way the laws are currently written and enforced, the antitrust agency is unlikely to even know about the increases in provider concentration.”

This comes down to a matter of deal frequency and size. “Deals are usually investigated for antitrust issues one transaction at a time,” he says. “These physician-group acquisitions tend to be very small, such that individually they’re not anticompetitive. Even if deals involved 10 doctors at a time, they probably wouldn’t get much attention. But collectively they can definitely be anticompetitive, over time.”

While regulators could seek to take action further down the road, they have little incentive and insufficient personnel to do so.

“The agencies don’t really have a stomach for going back and breaking up a large physician group,” Dranove says. “They’d rather stop something before it happens than break things up after the fact. The horse is already out of the barn at that point.”

What Can Be Done?

What does this mean for the quality of healthcare delivered by these increasingly large providers?

“We can’t state whether quality has improved as a result of these market dynamics,” Dranove says. “So many factors affect quality that it’s hard to study. That means our research hasn’t painted the entire picture for policymakers and agencies.”

Still, the rising prices alone are significant. And there appears to be little that can be done to improve the situation.

Dranove points out that state-based agencies might be able to regulate provider integration: “State agencies could stop acquisitions by writing legislation to prohibit them. But that probably goes too far in the other direction.”

Insurers, too, have limited power over higher pricing.

“If insurers said, ‘If you become too large we won’t do business with you,’ they’d simply be shooting themselves in the foot,” Dranove says. “The physician group would just walk away from them to another insurer, taking all the enrollees with them.”

That is not to say insurers don’t have their own market power.

“I don’t want to make it sound like we know exactly where the balance of power lies in these issues,” Dranove says. “But the market power gained through integration certainly enhances the provider side of the ledger.”