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Does consolidation equal lower cost?

There was a large number of mergers and acquisitions last year in the healthcare industry. These activities were not limited to large companies purchasing smaller ones like, Cigna purchasing start-up company Brighter. There were several large mergers and acquisitions as well including CVS purchasing Aetna, and Advocate Health Care merging with Aurora Health Care. There have also been a multitude of smaller scale consolidation activities such as two smaller competitor hospitals merging or hospitals acquiring systems of clinics.

This trend towards consolidation in healthcare has been happening for several years now, with a large number of hospital mergers. This rapid growth in mergers and acquisitions over the last several years will continue into 2018 and beyond given the current environment, where it has become increasingly difficult to run a small hospital or clinic. This is due to pressure from insurance companies to reduce rates among other factors.

Regarding providers, advocates of the consolidation trend towards argue that larger institutions have several advantages over smaller ones. These consolidated larger organizations hope to better navigate the rising costs of staffing and bad debt from the increased number of patients who are unable to pay back their high deductibles. They also hope to negotiate better rates from insurance companies, which would help with the providers balance sheet. However, these higher rates would also trickle down as an increase cost to patients. They also hope that these larger institutions would be better able to create new entities such as Accountable Care Organizations (ACOs) and new systems, such as the implementation or enhancement of electronic medical records.

Regarding insurers, advocates of mergers and acquisitions note that larger insurance institutions can make it easier to run the business for several reasons. Economies of scale can help with building analytic technologies that help insurers manage care effectively. Larger entities can also help attract employers to purchase their insurance products since they will be able to offer insurance to employees from multiple states and regions.

While there are certainly cases where it is a great idea to merge with or acquire another healthcare organization, the trend towards consolidation for the healthcare industry as a whole has some serious negative side effects of increasing the cost of healthcare to society as a whole without significantly improving care quality. In the vast literature on hospital mergers, it has been found that these hospital mergers increase costs to the patient without providing increased quality of care. Increased competition instead of consolidation will foster an environment that will lower costs, improve quality and generate innovation in the industry.

Consolidations result in higher healthcare costs due to negotiation power. As institutions merge, they have a larger presence and have more power when negotiating with insurers, which can increase healthcare costs for patients. Service rates are one example. Physicians are more likely to be receive higher rates when represented by a large hospital institution than when negotiating as a small practice. This means that physicians doing the same procedures are getting paid more because they are affiliated with the larger institution. With more larger institutions, this increases healthcare costs as a whole.

Cost saving network plans are more difficult to administer with fewer providers: Consolidations make it more difficult to implement network plans which can save health care dollars tremendously, because the networks rely on a multitude of different providers instead of a handful of large providers. Here are a few examples of network plans and how they save healthcare costs:

  • Regional network plan: In a regional plan, patients have an incentive to go to certain approved providers to obtain lower prices on their care. These type of limited network plans on public exchanges have premiums that are lower than traditional larger network plans.

  • Tiered network plan: In this type of plan, patients are able to decide which tier of provider they would prefer to use when they go in for care instead of on an annual basis when they choose their insurance. This would allow patients to be able to always draw on the full network of providers. This type of tiered plan has been difficult to implement in some places due to insurers blocking the plan if they are not in the preferred tier. This type of blocking has been restricted by legislation in Massachusetts which is seeing a growth in this type of plan.

Consolidations often foster an environment of little innovation and slow growth in care quality: Providers in the medical field are there to improve people's health and want to give the best quality care possible. They will provide ethical care to all patients no matter the compensation as noted in the Hippocratic Oath. However, larger institutions with less competition often fosters an environment that does not encourage the kind of innovation and improvements in care quality that is found in an environment with many smaller institutions.

One way to encourage competition is to foster small independent medical practices. This can done through legislation to limit the instances where hospital physicians are paid higher rates for services than independent physicians. This also can be done by offering help with electronic medical records to small practices which can be a barrier of entry.

To keep the costs of healthcare down, we need to reconsider the costs and benefits of consolidating healthcare providers and insurers. Instead of encouraging mergers and acquisitions we should foster competition among smaller healthcare providers and insurers which in turn will lower healthcare costs, promote innovation and increase the quality of healthcare.




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