Healthcare Business News

Reform Update: Accept consolidation trend and find ways to cope with rising prices, papers say

By Melanie Evans
Posted: May 21, 2014 - 4:00 pm ET

Hospital and physician consolidation underway won't end anytime soon—and shouldn't, in some cases—but with concentration comes the risk of rising prices that demands response from policymakers, according to newly published papers from attorneys and economists this week.

"There will be more consolidation," said Paul Ginsburg, a health policy and economics professor at the University of Southern California, who authored one of four papers released online by the journal Health Affairs. To expect the trend to stop is unrealistic in light of the capital necessary to adapt to changing markets and public policy. "Rather than fight it, we should just start looking at how to cope with the greater market power from increased consolidation."

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Consolidation has intensified across healthcare, with megadeals merging hospital giants such as Catholic Health East and Trinity Health and other acquisitions between health plans, medical groups and hospitals. Dealmakers say the transactions allow for greater coordination to reduce unnecessary services and improve outcomes, as well as sufficient scale to manage the financial risks of new payment models, such as accountable care organizations.

More coordination among hospitals and doctors is one promising fix for the harmful and costly waste created by healthcare's highly fragmented markets. The nation spends billions of dollars on unnecessary hospital visits, overuse of diagnostic tests and medication errors, which policymakers say can be saved with fewer gaps in patient care. Greater investment in information technology will improve easy access to patients' medical history and eliminate duplication, but closer work between hospitals and may also eliminate gaps in care and bolster prevention, proponents say.

That integration, however, also consolidates providers into larger networks that can command higher prices. Health plans risk consumer revolt by excluding large or prominent provider networks, weakening their bargaining power.

"We're better off with choices than not as consumers," said Mark Pauly, a professor of economics and healthcare management at the University of Pennsylvania. ACOs, which have expanded under Medicare as part of the Affordable Care Act, have encouraged consolidation to promote more effective care, he said. "That's worrisome," said Pauly, who was not an author on the journal articles. "It's not a foregone conclusion that it will improve the quality of care. That adds to my general apprehension about consolidation."

Ginsburg argues that it's up to policymakers to ensure larger networks compete on price and quality and don't exploit market power. For example, Massachusetts law prohibits hospitals and doctors from refusing to contract with insurers that exclude them from top tiers of plans that steer patients to low-cost and high-quality providers, he said. Tiers could be expanded to include more sophisticated options that steer patients toward specific services within hospitals, he said.

Policies can also inhibit competition. That might be the result of regulation forcing health plans to expand narrow provider networks. Narrow networks limit patients' choice of providers and offer lower premiums because the participating providers accept lower rates in exchange for the promise of more patients. Where narrow networks fail, governments could consider direct price regulation, he said.

Regulators could also influence emerging payment models under reform, such as accountable care organizations, to develop a more competitive marketplace, said William Sage, a professor at the University of Texas School of Law and author of another paper. Accountable care organizations should be encouraged to develop customizable bundles for specific services that carry a warranty based on performance, he said.

Warranties should be universal in healthcare, Sage said, just as automakers must fix defective ignition switches. That leaves hospitals and doctors at risk for losses for poor quality. Warrant risk, however, would not put providers at risk for demand for healthcare services, a risk typically borne by insurers. "We have a very sorry history of asking physicians to bear insurance risk," he said.

Bundles in an industry as complex as healthcare may be impractical, consultant Bruce Vladeck countered in a separate paper, and options such as tiered networks that rely on consumers to exert influence over prices overestimate consumers' clout.

"One effect of changes in health financing in the past two decades is unavoidably clear, if too often overlooked or minimized in importance by the health policy community: The average individual with health insurance is considerably worse off now than 20 years ago," thanks to higher out-of-pocket costs and more aggressive billing and collection practices, he said.

More on market power

UnitedHealthcare did not enter federally run health insurance exchanges, and that decision increased premiums by an average of 5.4% for the second-lowest priced sliver health plans sold to individuals, researchers estimated in a newly released economics paper. UnitedHealthcare, the largest U.S. insurer, has significant (20%) market share in some states where it operates, such as South Carolina and Arizona. The absence of a major rival potentially reduced price competition, researchers said. Indeed, federal spending on subsidized plans sold on the exchanges would be $1.7 billion lower if every eligible insurer entered the marketplaces.

Speaking of the exchanges

Deals like one between Presbyterian Healthcare Services in Albuquerque, N.M., and Intel Corp. will likely increase, say Fitch Ratings analysts who cover the not-for-profit healthcare sector. Presbyterian entered into a direct contract to provide health benefits for Intel employees. More such direct contracts are expected thanks to continued pressure to control health spending, analysts said in a new report. "Increasing frustration about rapidly rising healthcare costs have driven employers to search for non-traditional healthcare arrangements that provide financial incentives to more effectively manage annual healthcare spending for their employees," Jennifer Kim, a Fitch associate director, said in a news release.

Follow Melanie Evans on Twitter: @MHmevans

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