Healthcare consolidation: Obamacare bug, or feature?
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Two articles over the weekend highlight the continuing effect of Obamacare on the health care industry - particularly how it is accelerating industry consolidation.

In both the insurance and hospital industry, players are consolidating to lower costs, gain market share, and defend their bottom lines.

The big question, however, is whether these trends will ultimately benefit consumers and the health care system as a whole, through improved quality and lower costs.

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First, on the provider side, hospitals are snapping up independent physicians' offices and integrating them into their networks. Along the way, costs are going up because hospitals have more power to bargain for higher prices from insurers.

The Wall Street Journal explains:

As physicians are subsumed into hospital systems, they can get paid for services at the systems' rates, which are typically more generous than what insurers pay independent doctors. What's more, some services that physicians previously performed at independent facilities, such as imaging scans, may start to be billed as hospital outpatient procedures, sometimes more than doubling the cost.

The result is that the same service, even sometimes provided in the same location, can cost more once a practice signs on with a hospital.

Major health insurers say a growing number of rate increases are tied to physician-practice acquisitions. The elevated prices also affect employers, many of which pay for their workers' coverage. A federal watchdog agency said doctor tie-ups are likely resulting in higher Medicare spending as well, because the program pays more for some services performed in a hospital facility.

It's hard to fault the physicians for moving into hospital practices: they can get more predictable hours, and have to devote less of their time and attention to dealing with administrative hassles like chasing down reimbursements from insurers. And hospitals would argue that consolidation will improve overall quality through better quality controls and integration across multiple service providers.

That's the optimistic reading.

A less optimistic reading is that hospitals will use their enhanced market power to raise prices, and shift patients into more lucrative settings or services (evidence-based, of course). Previous efforts to control health care through price controls have generated similar unintended consequences - leading providers to simply shift their mix of services to maximize revenue. Integration could also lead to a stagnation of innovation in health care services, as hospitals focus on maximizing revenue from payers rather than delivering care in ways would threaten their own dominance of the market.

True innovation, after all, rarely comes from large incumbent players in any industry.

The other consolidation trend is at the insurer level, where insurers are struggling to meet Obamcare's higher compliance costs, caps on profits, and requirements that they spend more on health related services and less on benefits administration.

Two recent insurance mergers, between Aetna and Coventry Health Care and, earlier, Wellpoint and Amerigroup, are just the tip of the trend, with more mergers expected according to the Washington Post:

...the health care industry is increasingly turning to consolidation as a way to cope with smaller profit margins and higher compliance costs that many anticipate when the federal government's health care reforms under the Affordable Care Act take effect. ...

The regulatory limitations on their margins mean that to drive profitability, they need to get leverage on [sales, general and administration], said David Windley, an analyst with Jefferies & Co. "In order to do that, they need to be bigger."

The government prefers to deal with a few bigger players rather than lots of small ones, so you're not likely to hear any complaints from the Beltway as industry consolidates. But it's unlikely to improve competition or innovation in health care markets.

Bigger, after all, isn't always better. Often, it just means more of the same. And that's the last thing America's health care system needs today.

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