Does Increasing Hospital Concentration Harm Patients?

By Kris Szumigalski

Hospital Concentration Has Increased Dramatically

The US hospital market has long exhibited high concentration. In 1987, the average market’s HHI (a common measure of market concentration) stood at 2,340. For context, the US Department of Justice considers markets with HHIs of 1500–2500 as “moderately concentrated” and markets with HHIs of >2500 as “highly concentrated.”

This concentration has only increased over time. By 2006, the average HHI had jumped to 3,161 — a 35% increase, placing hospital markets well past the “highly concentrated” mark.

To get a sense of what this concentration means, if we divide the country into 306 markets (by HRR), the largest hospital in each market would account for an average of 42% of all hospital inpatient days. And the top 3 hospitals would account for 77% of all hospital admissions.

So, why have hospitals become more concentrated? One reason is that the Affordable Care Act effectively incentivizes it. But first, let’s look at a different type of consolidation.

In Addition to Becoming More Concentrated, Hospitals Have Grown Vertically Too

Hospitals acquiring other hospitals is known as horizontal integration. But hospitals are also growing another way: vertically.

Hospital ownership of physician practices has increased from 24% of practices to 49% from 2004 to 2011. More recent growth has been just as dramatic: in 2012 hospitals employed 25% of all physicians. In 2015 they employed 38%.

So why is this happening? One major reason: money. Hospital outpatient departments (HOPDs) get higher rates of reimbursement (from Medicare) than independent doctors, “even when those services are safely performed in physician offices.”

Further, vertical integration gives the newly acquired physician group extra bargaining power when negotiating prices with insurance companies, according to a study in JAMA. The study goes on to conclude, “increases in physician-hospital integration… were associated… with increased prices for outpatient services, with no accompanying changes in utilization that would suggest more efficient care from better care coordination and economies of scale.”

Finally, it’s worth noting that surveys show that the top concern of independent physicians is… eroding bargaining power. At the end of the day, money provides the main motivation for vertical integration.

But… Does More Integration Mean Better Coordination of Care?

Even if money drives vertical integration, that doesn’t mean it can’t bring good effects. For example, the earlier referenced JAMA study hypothesizes that greater vertical integration could decrease spending “through better coordination and management of health care.”

It’s common knowledge that better care coordination lowers health care spending. It’s partly why the ACA incentivizes bigger hospitals, and it’s used as a rationale for creating bigger hospitals. The logic goes like this: our country’s complex health system often doesn’t communicate well with its many parts. A patient with shoulder pain gets referred to a specialist who performs a battery of tests, some of which her primary care physician already performed. A separate patient with a web of doctors slips through the cracks and doesn’t go to her regularly scheduled check up. She ends up with an expensive ER visit from her uncontrolled blood pressure.

There’s just one problem with this obvious intuition: the evidence doesn’t back it up. A JAMA study reviewed the findings of 15 different randomized trials evaluating the effects of better care coordination. The result? Not a single one generated net savings. Only three of the trials showed any savings at all (all of which were offset by the cost of the program). The study’s authors concluded, “it is clear that even if savings could be achieved they would be modest, even for the most successful programs.”

Also worth mentioning: contrary to popular belief, evidence shows that prevention isn’t necessarily cheaper than the cure.

Greater Concentration Means More Bargaining Power… and Higher Prices

The clearest effect a rise in provider concentration brings is… higher prices.

The logic behind this is simple: greater market share brings greater negotiating power. A monopoly can charge the highest prices. The closer the hospital is to a monopoly, the greater its ability to negotiate high prices with health insurers.

This negotiation dynamic does not result solely from the concentration of hospitals. The concentration of the payers, or health insurers, matters too. Studies show that increased insurer concentration results in greater negotiating power for the insurer, and lower negotiated provider prices, all else equal.

That’s why increasing insurer concentration incentivizes increased provider concentration… in some sense, it’s a power struggle over who gets more bargaining power. As hospitals become more concentrated, insurers in turn also look to increase their negotiating clout, and the cycle feeds on itself. Unfortunately, the consumer often gets caught in the crossfire.

But does greater scale bring lower costs?

Short answer: probably not. A New England Journal of Medicine article sums it up like this: “The harsh reality is that it’s difficult to find well-documented examples of mergers that have… lower overall costs.”

Concentration and its Effects on Quality

Greater provider concentration probably leads to worse quality provided. Essentially, greater hospital competition forces those hospitals to provide better services (if they don’t, customers, who now have more choices, won’t go to them).

However, there is not a clear answer to this question…

First, there is no clear answer because this is not a clear question. This merits a whole separate post, but “higher quality” healthcare doesn’t have a clear cut definition.

Second, even brushing aside any definitional issues, depending on the design of the healthcare system, the economic logic of what might happen to “quality” with greater provider concentration is uncertain. Studying this question is very difficult if not impossible to do with actual randomized controlled trials (the gold standard of evidence in the academic world), so academics must use observational and econometric methods, a decidedly less convincing manner of providing evidence. Uncertain economic logic combined with mediocre evidence makes studying effects tough.

It’s also worth considering evidence that associates higher hospital volume with better outcomes. Proponents of larger hospitals argue that it’s the better-resourced hospitals, with a wide range of specialists and technology, that provide the best care. However, this study in the NEJM shows that it’s actually surgeon volume that “account[s] for a relatively large proportion of the apparent effect of hospital volume.” The study argues that some of the hospital volume effect remains valid, however, particularly for procedures where the required technical skill is low but possibilities of related complications are many. So it’s worth noting that bigger hospitals could help achieve better outcomes.

In short, though, the balance of this weak evidence seems to favor the theory that greater concentration leads to more poorly provided health care.

What Does The Landscape Look Like From Here?

Hospitals have plenty of incentives to keep increasing their concentration. But a big obstacle stands in their way: the FTC.

The FTC has a history of holding hospital mergers to close scrutiny, and experts say that stems from both sides of the aisle. Therefore, it’s a safe bet that the FTC’s scrutiny won’t change with every shift in the political winds. A recent court case, FTC vs Advocate and Northshore, provides a great case study. First, the case broke ground because the Courts ruled against the merger between two urban hospitals, traditionally a merger that avoided scrutiny. Perhaps more importantly, the Court made clear (as does a long history of case law) that the touted benefits (to consumers) of the merger count only if those benefits would not be possible without a merger. Further, the Court emphasizes that both decreased price competition and quality competition are possible reasons to stop a merger. The Court’s ruling on merger-specific efficiencies mirrors everything we’ve already gone through, with the judges ruling, “We are skeptical that such a deficiencies defense even exists.”

On one hand, the Courts look poised to play a powerful role in curtailing the further concentration of the hospital market. It seems clear, however, that hospitals have a lot of incentive to keep consolidating, both vertically and horizontally. The growth doesn’t have to be a strict merger either. It’s a safe bet that consolidation’s strong financial rewards but heavy legal risk will drive more and more shadow consolidation, in which healthcare providers form relationships but technically do not merge.

The future is always uncertain. But it’s clear that the trend of increased provider consolidation and its corresponding anti-competitive effects impose high costs, with uncertain benefits. Given this framework of seemingly unfavourable costs and benefits, we think it’s time to start asking ourselves whether more concentration in provider markets brings patients more harm than it does good.

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