Hospital megamergers may lower overhead, but at what cost?

After a frenzied week of large-scale merger announcements between hospital systems across the nation, experts are left wondering: will these tie-ups transform American healthcare for the better, or stick patients with a higher bill?

St. Louis-based Ascension Health and Renton, Wash.-based Providence St. Joseph Health are rumored to be mulling a merger that would create the nation's largest hospital system, according to a report by the Wall Street Journal. Meanwhile, Catholic Health Initiatives and Dignity Health, in a long-awaited announcement, said last week they have signed an agreement to merge, creating a giant system with 139 hospitals and $28.4 billion in revenue.

That news came just days after Advocate Health Care and Aurora Health Care said they would merge in a $10.7 billion deal.

But as health systems combine in a bid to gain more leverage over insurers as health plans aim to keep patients away from the emergency room and inpatient wing, it's unclear if patients stand to benefit from the mergers.

Merging hospitals typically claim they will lower costs by increasing efficiency. But Ascension and Providence "are already two really big systems," said Jonathan Grossman, a partner in the law firm Cozen O'Connor's antitrust group. "How much more efficiencies are there to be gained?"

An Ascension-Providence deal, though not yet confirmed by the health systems, would put the combined company ahead of HCA, which has 177 hospitals and reported $41.5 billion in 2016, according to Modern Healthcare data. Because Ascension and Providence are both Catholic hospital chains, the deal must be approved by church authorities as well as regulators.

Ascension and Providence declined to comment on the rumored merger.

Hospitals are under increasing pressure to merge as inpatient revenue slows to a crawl and expenses related to personnel and technology balloon. Patients, increasingly sensitive to cost, are opting to get more of their care outside of hospitals, and improved technology is helping them do so. That, plus insurers' push for more outpatient care in cheaper settings, puts hospitals' bottom lines in jeopardy, especially if they rely heavily on revenue from inpatient care.

In recent years, there's been an uptick in the number of deals, including mergers, acquisitions, joint ventures or joint operating agreements, struck between hospitals and health systems.

At the end of the third quarter of 2017, hospitals and health systems had struck 87 deals, putting this year's transactions on a path to outpace last year's 102 deals, according to consultancy Kaufman Hall, which tracks provider mergers. Eight deals struck this year were between companies with nearly $1 billion or more in revenue, compared with just four in 2016.

As deals have increased and the Federal Trade Commission has ramped up antitrust enforcement, hospitals have looked for new ways duck federal antitrust scrutiny. Those methods include buying up physician practices or striking small deals that don't meaningfully increase market concentration, according to Barak Richman, a law professor at Duke University and an antitrust expert.

Hospital systems also look to merge with organizations outside of their geographic areas. That's what Ascension and Providence, CHI and Dignity, and Aurora and Advocate are attempting to do, and it's an issue the FTC has yet to tackle, Richman said.

"Even though they don't compete for a common consumer, they do negotiate with common insurers, and there's some suggestion they can leverage that collective bargaining power into higher prices," Richman said.

If a massive health system forces an insurer to bring all of its hospitals into a single insurance network, that could raise the prices of services across the hospitals, Grossman said. The U.S. Justice Department has investigated hospitals for this conduct, but has so far never brought a case, he said.

"I think they don't believe that the antitrust law supports that theory," Grossman said. "It's a tough theory."

And it's perhaps even more difficult to prove, since some insurers, particularly Blue Cross and Blue Shield contractors, don't allow for nationwide contracts, Grossman said. Blue Cross and Blue Shield of Michigan contracts with Michigan providers and Anthem Blue Cross and Blue Shield of Indiana contracts with Indiana providers.

However, Ken Kaufman, managing director of Kaufman Hall, said prices are unlikely to increase as a result of the recently announced and rumored hospital merger deals because the mergers won't increase market concentration.

At least one study has examined so-called cross-market hospital mergers and their effects on prices. If the merging hospitals were in the same state but at least 30 minutes apart, prices increased by about 7% to 10%, according to the study conducted by Northwestern University, Harvard University and Columbia University. But there were no significant price changes resulting from mergers between hospitals in different states. The hospitals within the same state were more likely to share common insurers and customers, the study said.

It's more likely the recent merger deals are going to focus on how the companies can transform healthcare by improving outcomes and lowering costs, Kaufman said. It's easier to do those things when an organization has size and scale behind it, he said.

Providence St. Joseph, the product of a July 2016 merger between Providence Health & Services and St. Joseph Health, has roots in the insurance industry. It derived 18% of its revenue in fiscal 2016 from its health plans and accountable care. Whit Mayo, an analyst with the financial services firm Robert W. Baird & Co., said Ascension may see value in partnering with a system that has experience on the health insurance side.

"It definitely gives you a different skill set that perhaps they see as potentially valuable," he said.

Lyndean Brick, president and CEO of healthcare consulting firm the Advis Group, said the rumored deal could create a new lobbying powerhouse in Congress as not-for-profit healthcare faces increasing threats like tax reform and cuts to the 340B program.

"The combination really gives them a very big voice in policymaking, and it can't come at a more important time," she said.

Brick said both systems have track records of being innovative in working toward their Catholic mission of increasing access, and she thinks as a single entity, they'll experiment with addressing social issues like housing and transportation that affect healthcare.

Ascension rounded out fiscal 2017 with a 3.9% revenue increase and a net surplus of $1.86 billion thanks to strong investment gains. Its operating income, however, fell by $200 million to $553 million, partly due to a 9% increase in uncompensated care.

Providence St. Joseph suffered a $255 million operating loss in its fiscal 2016, the most recently ended fiscal year, due to lower reimbursement and a higher percentage of Medicaid patients and patients with higher acuity.

Those issues will continue to plague not-for-profit healthcare, according to Moody's Investors Service's negative 2018 outlook for the sector. Inpatient volume growth will remain low as care continues to move outside of hospitals. Government payers like Medicare and Medicaid, which have reimbursement rates that are much lower than commercial insurers, will make up a larger proportion of overall reimbursement to hospitals.

Indeed, Providence St. Joseph outlined how those trends are taking a toll in its most recent financial condition report, which showed that ambulatory services growth is outpacing acute and inpatient services. Nearly 20% of the system's revenue comes from its health plans and accountable care.