Reporter Cinda Becker wrote in her May 16 cover story that medical-device companies are cornering huge swaths of the market through acquisition, using their enhanced clout to offer ever-larger bundles of disparate products to providers faced with fewer supply choices. It is just the latest evidence that the business arms race isn't making healthcare more safe, affordable or accessible.
The megadeals keep on coming: Johnson & Johnson's $25 billion offer for Guidant Corp. in medical devices. WellPoint Health Networks' $16.4 billion merger with Anthem in managed care. Fresenius Medical Care's $3.5 billion bid for Renal Care Group in dialysis. Some $2 billion worth of first-quarter deals in the pharmaceutical industry. A recent surge in hospital acquisitions. A renewed push for larger medical groups. In all, $39 billion worth of healthcare deals for 2004.
Each time a deal takes place you hear the solemn pronouncements about the synergies and the economies of scale that will bring us everything from better information technology and a wider array of services to better quality of care.
Amid all the monopolizing, however, evidence mounts about negative consequences for both innovation and cost control. Hospitals expect that the Guidant-J&J deal would keep prices for drug-eluting stents from dropping because Guidant would be eliminated as a potential supplier. WellPoint's new chief executive, Larry Glasscock, says that despite his company's huge new membership base and a 107% increase in first-quarter profits, lower prices aren't in the offing. Meanwhile, Big Pharma firms are snapping up smaller biotechnology innovators because their own R&D pipelines keep coming up empty, and drug prices continue their never-ending rise. A study released last week by the Center for Studying Health System Change spells out the consequences: More adults with chronic conditions were being priced out of life-saving medicines.
Perhaps the most-studied example of the consequences of consolidation is that of insurers vs. hospitals. The latest installment of the Blue Cross and Blue Shield Association's annual nose-thumbing at the hospital industry found that the average cost per hospitalization climbed 5.4% in 2002 to $7,000, mainly because of consolidation and greater use of expensive technology. That notion gained some credibility in January when the journal Health Affairs published a large study of acute-care hospitals in four states, which found that hospitals that were part of a system earning higher profit margins by increasing spending per patient, with little or no effect on quality of care.
On the other hand, insurers should take no comfort from CMS health cost data. The net cost of insurance-the difference between premiums paid in and benefits paid out-rose 13.6% in 2003, the very same year that hospital cost inflation moderated, a trend that seems to be continuing. When United HealthGroup announced that its first-quarter 2005 profits rose 41%, it said income was spurred by lower-than-expected costs for hospital care.
You have to wonder if this healthcare arms race is a case of mutually assured destruction. One theory of market consolidation in healthcare is that everyone is nervous about the same factors: potential cuts in government reimbursement, payment based on quality-of-care and a push for healthcare IT. Companies believe they must consolidate to keep afloat in this sea of change. All those factors, however, are driven in large measure by concerns over costs, which are rising because of consolidation.
I think that a bigger factor in consolidation is an old-fashioned one, that companies fear their competitors are getting too big, so they must grow through acquisitions as well. The vicious cycle keeps spinning, much like the nuclear arms race.
This leads to a question for the monopolists: When will economies of scale, synergies, etc., start leading to meaningful cost control instead of market domination and maximization of profit?