Effects of U.S. Hospital Consolidation KATE HO, COLUMBIA UNIVERSITY - PowerPoint PPT Presentation

Effects of U.S. Hospital Consolidation KATE HO, COLUMBIA UNIVERSITY FEBRUARY 2018

U.S. hospitals have been consolidating into larger systems Source: Irving Levin Associates and American Hospital Association

Many – but not all – hospital mergers have traditional horizontal overlap Notes: Based on 528 general acute care hospital mergers reported by Irving Levin in 2000-2012

Substantial evidence that within-market mergers lead to higher hospital prices • FTC Retrospectives ◦ Haas-Wilson and Garmon (2011) ◦ Merger of Evanston Northwestern and Highland Park hospitals. ◦ 4 out of 5 insurers had substantial price increases due to the merger. ◦ 20.1%, 26.5%, 35.1%, 64.9% (relative to non-merging Chicago hospitals). ◦ Merger of St. Therese and Victory Memorial didn’t increase prices. ◦ Tenn (2011): Sutter and Summit hospital systems in SF Bay area. (28-44%) ◦ Thompson (2011): Cape Fear & New Hanover hospitals, Wilmington, NC. (56-65%) • Other approaches generate consistent evidence: often 20-40% price increases from within-market mergers ◦ Vita and Sacher (2001); Gaynor and Vogt (2003); Dafny (2009); Nevo, Gowrisankaran, and Town (2014) • Increased insurance premiums ◦ Trish and Herring (2015): 3 to 2 hospital merge, 4.2% premium increase.

This makes sense in terms of theory: insurer-hospital price negotiations • Insurer’s goal: to build a provider network that employers (and consumers) will value. • Issue from providers’ perspective: ◦ If two hospitals are substitutes, each hospital’s bargaining leverage is limited ◦ If one declines to join network, customers will be “almost as happy” with access to the other • What happens if the two hospitals merge? ◦ Now they can threaten to walk away from insurer’s network ◦ Insurer will lose substantial revenue due to loss in network value ◦ So the merger generates bargaining leverage and a price increase

UNC Health System/Carolina HealthCare “In an interview at The News & Observer’s offices on Wednesday, executives of the two companies said the partnership would give them the leverage to negotiate better deals with insurance companies and vendors, saving the hospitals millions of dollars .” http://www.newsobserver.com/news/business/article170437247.html

What about cross-market hospital mergers? E.g. Catholic Healthcare Partners (CHP) acquires Baptist Health (BHS) CHP BHS

What about cross-market hospital mergers? E.g. Catholic Healthcare Partners (CHP) acquires Baptist Health (BHS) Non-adjacent (far- away) system members CHP BHS Cross-market but still Horizontal overlap “adjacent” i.e. nearby

Recent evidence suggests cross-market mergers tend to lead to higher hospital prices • Anecdotal ◦ Community Tracking Study of 12 metro areas (Berenson et al 2012) ◦ “Numerous participants in contract negotiations between health plans and hospitals noted that provider leverage depends on how big the hospital or hospital system is and how much of an insurer’s patient volume it generates.” • Systematic ◦ Lewis and Pflum 2015: Acquisition of independent hospitals by systems followed by 17% price increases even when other members are outside broad metro area ◦ Dafny , Ho and Lee 2017: distinguish between “adjacent” and “non - adjacent” hospitals. Evidence of 7-10% price increases after system acquisition for adjacent but not non-adjacent.

Dafny, Ho and Lee (2017) • ~10 percent average price increase for adjacent hospitals /43 • No significant change for non-adjacent hospitals p<0.05 p<0.01

Again, price increases make sense given theory • Insurers’ customers are employers ◦ Employees may be dispersed over fairly wide geographic area • Employer chooses a plan menu to offer employees ◦ Likely to prefer plans that cover the entire geographic area • Cross-market employer presence implies price effect of mergers ◦ Employer unlikely to drop a plan that loses 1 hospital from network ◦ Much more likely to drop plan removing multiple hospitals – even if in different markets – because this affects many more employees ◦ So a cross-market merger can lead to increased bargaining leverage • Important market definition is the one defined by insurer’s customers – i.e. employers – not by individual patients.

What about “merger efficiencies”? • Consolidation could lead to potential benefits ◦ Investment in care coordination, quality. ◦ Achievement of scale ◦ Cost reductions ◦ Volume-outcome relationship. • But, … ◦ Consolidation isn’t integration. ◦ Evidence doesn’t support the claims. ◦ Costs not lower. ◦ Little evidence of improved quality; in fact quality often falls.

Evidence on Harms from Consolidation: Hospital Quality • Consolidation can lead to substantially lower quality – administered prices ◦ 1.46 percentage points higher mortality rate in most concentrated markets for Medicare heart attack patients (Kessler and McClellan, 2000) ◦ Higher mortality rates in more concentrated markets for English NHS patients (Cooper et al., 2011; Gaynor et al., 2014; Bloom et al., 2015) • Consolidation can lead to lower quality – market determined prices (but some studies go the other way) ◦ Hospital merger (Evanston) had no effect on some quality indicators, harmed others (Romano and Balan, 2011) ◦ Hospital mergers in NY state had no impacts on many quality indicators, led to increases in mortality for AMI , heart failure patients (Capps, 2005) ◦ Removal of barriers to entry led to increased market shares for low mortality rate CABG surgeons in PA (Cutler et al., 2010)

Evidence on Benefits of Hospital Consolidation • Schmitt (2017) – cost savings from hospital mergers ◦ Acquired hospitals have lower costs; acquiring hospitals do not ◦ Mergers in the same market do not lower costs • Hwang et al. (2013) – effects of integrated systems ◦ Most studies show association between integration and quality, few showed cost savings. • Burns et al. (2015) – effects of hospital systems on costs ◦ Examine 4,000 US hospitals from 1998 to 2010. ◦ No evidence that system members have lower costs. • Tsai and Jha (2014) – effects of hospital consolidation on costs and quality ◦ Merging can increase volumes, but doesn’t always improve outcomes . ◦ Evidence shows that competition improves quality. • Vogt and Town (2006) – effects of hospital consolidation on costs, quality. ◦ Combining facilities lowers costs, mere consolidation does not ◦ Consolidation lowers quality of care. • Gaynor, Kleiner, and Vogt (2015) – hospital scale and scope economies. ◦ There are scale economies – seem to be exhausted around 330 beds ◦ No evidence of scope economies (cheaper to produce both secondary and tertiary care, or different kinds of treatments, nervous system, eye).

What Should We Do? • All these results underscore importance of competition policy ◦ Hospital mergers seem to lead to price increases ◦ Both within- and across-markets ◦ Little or no corresponding cost reductions ◦ No consistent evidence of quality improvements • Antitrust: Federal and State level ◦ Continue and step up horizontal merger enforcement ◦ Across markets as well as within them! • What to do in highly consolidated markets? ◦ Break up large, integrated systems? ◦ Regulation of conduct?