Fact Check: Provider Consolidation Drives Up Prices

Provider Consolidation Drives Up Prices

Research clearly demonstrates that provider consolidation is driving up health care costs for consumers and employers.

  • An analysis of provider consolidation by Cory Capps and David Dranove, Market Concentration of Hospitals, found that “in 2009, hospital ownership was ‘highly concentrated’ in over 80% of the 335” areas studied.
  • James Robinson, a professor of health economics at UC Berkeley, recently released two new studies examining the impact that hospital market concentration has on medical prices.
    • Mr. Robinson’s first study, Hospital Market Concentration, Pricing, and Profitability in Orthopedic Surgery and Interventional Cardiology, was published in the American Journal of Managed Care (2011) and looks at the direct link between hospital market concentration and pricing.  It found that, “Hospitals have been merging with and acquiring nearby facilities, creating local and regional chains that potentially wield greater bargaining leverage than do stand-alone facilities.”  Moreover, the articles stated that, “Hospitals in concentrated markets were able to charge higher prices to commercial insurers than otherwise-similar hospitals in competitive markets…”
    • His second study, Hospitals Respond to Medicare Payment Shortfalls By Both Shifting Costs and Cutting Them, Based on Market Concentration, was published in the July 2011 edition of Health Affairs and examines how hospitals in concentrated markets and competitive markets respond to lower payment rates from Medicare.  From the article abstract: “The study presents empirical evidence that, faced with shortfalls between Medicare payments and projected costs, hospitals in concentrated markets focus on raising prices to private insurers, while hospitals in competitive markets focus on cutting costs.”
  • The latest issue brief (July 2011) from the National Institute for Health Care Management, Understanding U.S. Health Care Spending, found that, “Higher spending for hospital care and physician and clinical services accounted for half of the increase in total national health spending between 2005 and 2009 and more than 80 percent of the increase in private insurance premiums over the period.”  Moreover, the brief states that “rising prices per unit of service have played a larger role than rising utilization rates as a determinant of recent expenditure growth” and that one of the factors contributing to these higher prices is “ongoing provider consolidation and enhanced negotiating strength vis-à-vis insurers, resulting in an ability to extract higher payment rates from insurers.”
  • An issue brief from the Center for Studying Health System Change, Rising Hospital Employment of Physicians: Better Quality, Higher Costs? (August 2011), examined the trend of hospitals employing more physicians and concluded that: “While the potential of hospital-employed physicians to improve quality and efficiency has received attention, the potential for higher costs has received less attention. The existing fee-for-service payment system that encourages hospital strategies to use employed physicians to increase referrals and admissions, coupled with the market power of hospitals to gain higher payment rates, risks overshadowing potential quality gains.”
  • Paul Ginsburg and Robert Berenson, in an article in the February 2010 edition of Health Affairs, stated that “providers’ growing market power to negotiate higher payment rates from private insurers is the ‘elephant in the room’ that is rarely mentioned.”
  • In 2010, the Massachusetts Attorney General Martha Coakley released an updated report, Examination of Health Care Cost Trends and Cost Drivers, which found that “price increases, not increases in utilization, caused most of the increases in health care costs during the past few years in Massachusetts.”  Moreover, the report found that “price variations are correlated to market leverage as measured by the relative market position of the hospital or provider group compared with other hospitals or provider groups within a geographic region or within a group of academic medical centers.”
  • A 2006 report from the Robert Wood Johnson Foundation, How Has Hospital Consolidation Affected the Price and Quality of Hospital Care?, stated that, “Research suggests that hospital consolidation in the 1990s raised inpatient prices by at least five percent and likely significantly more. Prices increase 40 percent or more when merging hospitals are closely located.” The report also found that higher hospital prices do not translate to higher quality of care, saying: “[A] narrow balance of the evidence and the evidence from the best studies indicates that hospital consolidation more likely decreases quality than increases it.”
  • The Federal Trade Commission and the Department of Justice held extensive health care hearings in 2002 and 2003, and in their subsequent report noted the correlation between hospital concentration and high hospital prices: “Most studies of the relationship between competition and hospital prices have found that high hospital concentration is associated with increased prices, regardless of whether the hospitals are for-profit or nonprofit.”

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