A hospital trade group and healthcare economists squared off on the impact of hospital mergers, a debate that will continue to resonate amid an increasingly consolidated industry.
The American Hospital Association Wednesday released a study it had commissioned that supports mergers and acquisitions, making the case that they reduced costs at acquired hospitals and boosted care quality. Economists hosted a discussion following the report's release, sharing their research on how consolidation typically raises prices, often doesn't produce the expected savings and can diminish quality.
The methodology behind the research was central to the debate, as the AHA criticized certain studies for an insufficient sample size or otherwise flawed data while journalists and academics questioned the integrity of the AHA-commissioned study.
The number of hospital and health system mergers and acquisitions have steadily increased since 2003 at 38, up to 115 in 2017, according to Kaufman Hall. Hospitals account for about 33% of total healthcare spending, which reached $3.5 trillion in 2017 and accounted for 17.9% of gross domestic product. Hospital spending makes up the largest chunk of overall expenditures, said Zack Cooper, an associate professor of public health and economics at Yale University.
"There has been a pretty profound change in the (hospital sector), which in and of itself is 6% of GDP," he told reporters in a conference call Wednesday morning. "There have been thousands of transactions over the last decade."
The AHA study, prepared by Charles River Associates, concluded that mergers can provide the capital and clinical expertise to expand best practices across systems, reducing costs and readmission and mortality rates.
The AHA-commissioned study used a database that tracked acquisitions of all federal short-term acute hospitals in the U.S. from 2009 to 2017 as well as the CMS' Healthcare Cost Report Information System and its Hospital Compare database. It also relied on interviews with leaders of 10 hand-picked hospital systems. Unlike other studies, Charles Rivers was not able to obtain insurer claims data.
The study found that acquired hospitals saw a 2.3% reduction in operating expense per admission. Acquisitions were also associated with a decrease of 3.5% in net patient revenue per adjusted admission, which the report suggests that "savings that accrue to merging hospitals are passed on to patients and their health plans."
As for quality metrics, the study claimed a 1.1% decrease in the 30-day readmission rates for patients who suffered a heart attack and were treated at acquired hospitals as well as a 1.7% decline in mortality rates for pneumonia.
"Mergers actually decreased costs at acquired hospitals, allowed more widespread use of best practices, reduced readmissions and mortality rates, and provided the capital to bring in new technology," AHA CEO Rick Pollack said in a briefing with reporters, adding that mergers help achieve the scale hospitals need to address issues like the social determinants of health.
Hospital consolidation has been a response in part to rising IT, pharmaceutical and labor costs, and declining inpatient admissions, as well as increasing reliance on government payers. Hospitals claim that they could not survive on the Medicare and Medicaid reimbursement that do not cover the entire cost of care.
They can mitigate that pressure by using scale to extract higher prices from insurers, which are often passed onto the consumer via higher premiums, economists argue. When journalists asked how the AHA would counter the argument that hospitals look to gain bargaining leverage over insurers via mergers, the association pointed to the reduction in revenues at acquired hospitals, 73% of insurer markets that are highly concentrated, and the fact that hospitals don't control premium prices for commercial health plans. Notably, health system executives can earn bonuses for completing a merger or acquisition.
Economists cited a number of studies showing hospital prices increasing along with the facility or system's market power. One study from Cooper; Stuart Craig, an economist at the University of Pennsylvania's Wharton School; Martin Gaynor, economics and health policy professor at Carnegie Mellon University; and John Van Reenen, an economics professor at MIT Sloan School of Management, found that prices at monopoly hospitals were 12% higher than those in markets with four or more rivals. In concentrated insurer markets the opposite occurs—hospitals have lower prices and bear more financial risk, according to the study.
Examining the 366 mergers and acquisitions that occurred between 2007 and 2011, the academic researchers concluded that prices increased by more than 6% when the merging hospitals were 5 miles or less apart.
Some mergers could produce benefits related to eliminating duplication and providing more coordinated care, Gaynor said. But consolidation is not the same as integration, which is much more difficult, he said. Mergers could also impede competitors, discourage innovation and reduce quality, Gaynor said.
"There is substantial and clear evidence that that prices increase when there are mergers between close competitors," he said.
Leemore Dafny, a professor of business administration at Harvard Business School, studied cross-market mergers, finding that if the merging hospitals were in the same state but 30 to 90 minutes apart, prices increased by about 7% to 10%. There were no significant price changes resulting from mergers between hospitals in different states. Still, market power may arise from combinations over broad geographic areas due to a common customer base, often large employers looking to cover their employees in different regions, which ultimately reduces competition.
Cross-market mergers "may indeed inhibit competition" and "a merger between hospitals negotiating with the same insurer can yield an increase in the hospitals' negotiated prices even if these hospitals are not substitutes," according to the study.
"State and federal agencies are calling; they are listening," Dafny said. "They are concerned about the data that is out there."
Executives claim that scale will help them save on vendor contracts, but those savings are diluted in far-flung organizations, research shows.
Horizontal hospital mergers only saved acquired hospitals $176,000, or 1.5%, annually on average, which represents only 10% of what is claimed in the merger justification, according to a working paper from Craig and his peers at Wharton who analyzed about 80 mergers. Those savings predominantly came from neighboring hospitals or systems that bundled expensive physician-preference items.
"There is some evidence of savings, although not much," Craig said.
