When Healthcare Providers Consolidate, Medical Bills Rise
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Healthcare Policy Feb 1, 2018

When Health­care Providers Con­sol­i­date, Med­ical Bills Rise

Can any­thing be done to rein in this expen­sive trend?

The impact of healthcare mergers and acquisitions on price.

Yevgenia Nayberg

Based on the research of

Cory Capps

David Dranove

Christopher Ody

What hap­pens to your med­ical bills if your doctor’s prac­tice merges with anoth­er or is acquired by a local hospital?

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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.” 

Inte­gra­tion is a well-known trend and hos­pi­tals often claim it will dri­ve cost sav­ings. But that’s dif­fi­cult to document.”

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.

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

This is what the researchers found often happened. 

What Are the Key Issues dur­ing a Health-Insur­ance Antitrust Case?

David Dra­nove served as the Depart­ment of Justice’s eco­nom­ics expert in a major health­care antitrust case last year. Ulti­mate­ly, a fed­er­al judge thwart­ed the merg­er effort of giants Anthem (a Blue Cross plan oper­at­ing in 14 states) and Cigna, the country’s num­ber two and num­ber four insur­ance providers. 

Dra­nove recent­ly dis­cussed the case’s biggest stick­ing points at a post-mortem” of the merg­er host­ed by Kellogg.

Dra­nove spoke to a key issue in the case: whether insur­ers reduc­ing pay­ments to health­care providers is a legit­i­mate jus­ti­fi­ca­tion for a merg­er pro­vid­ed that the insur­ers pass along those sav­ings to con­sumers. To use his anal­o­gy: Is it OK to rob Peter (that is, med­ical providers) to pay Paul (con­sumers)?

Below is an edit­ed excerpt of Dranove’s remarks. 

The courts make it clear that when you’re try­ing to answer the ques­tion of whether rob­bing Peter to pay Paul is a legit­i­mate jus­ti­fi­ca­tion for a merg­er, you have to learn more about what’s going on in this rob­bery. 

First of all, are you sure the insur­ers are going to rob Peter? Will the merged com­pa­ny reduce the fees they are pay­ing to providers? Do they have a plan to exe­cute this? And can you quan­ti­fy how much you’re going to rob Peter? Is the num­ber big enough to off­set con­cerns about the exer­cise of mar­ket pow­er in the sale of insur­ance? The court was skep­ti­cal about how much Anthem planned to take from Peter and give to Paul. 

The sec­ond ques­tion is, Do the insur­ers have to merge to rob Peter?” 

Exec­u­tives tes­ti­fied at tri­al that the rules of the Blue Cross Asso­ci­a­tion con­strained some of the steps Anthem could take to reduce pay­ments to providers. Sim­ply put, Anthem could not absorb Cigna with­out vio­lat­ing these rules. To come into com­pli­ance, Anthem planned to take some steps that it could have tak­en with­out the merg­er. In oth­er words, Anthem did not have to merge with Cigna in order to rob Peter. Again, this fed the court’s skep­ti­cal view of the merg­er. 

But sup­pose that Anthem is going to rob Peter and it has to merge to do that. The third and most inter­est­ing ques­tion is whether pay­ing Paul jus­ti­fies the rob­bery. If Peter is pow­er­less, say a solo physi­cian in a strug­gling prac­tice, this hard­ly seems fair. But sup­pose Peter is a pow­er­ful hos­pi­tal sys­tem whose prices are well above com­pet­i­tive rates. Per­haps some­one should be pulling those prices down. Rob­bing Peter to pay Paul might then make sense. The court left this door open for future merg­er analy­ses, but giv­en its skep­ti­cism about oth­er aspects of the merg­er, it chose not to walk through. Econ­o­mists would be equal­ly hes­i­tant, even if oth­er aspects of the merg­er were on firmer ground.

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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.” 

Featured Faculty

David Dranove

Walter J. McNerney Professor of Health Industry Management, Professor of Strategy

Christopher Ody

Research Assistant Professor of Strategy

About the Writer

Sachin Waikar is a freelance writer based in Evanston, Illinois.

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