Provider Consolidation Does Not Lower Prices

A wave of healthcare mergers and acquisitions has made headlines lately, but it's not the first time in recent history that healthcare providers have attempted to consolidate their market power this way. In the 1990s hospital systems grew by acquisition and affiliation, but were largely unable to achieve the synergies they wanted. The motivation at that time was to protect -- by acquiring -- their referral base. This time they are driven largely by defensive pressures to increase their clout in negotiation with payers as well as to avoid being taken over themselves. Additionally, some recognize that to form an ACO they need to acquire some specialty practices in order to provide the range of services their assigned beneficiaries require.

These large-and growing-hospital systems are seen by some as an antidote to rising costs. Efficiencies of scale that can be achieved through consolidation will, it is anticipated, drive down costs thus leading to lower prices for all consumers whether government or privately insured. However our confidence in the hospital's ability to achieve these benefits is low based on previous experience in the 1990s and beyond.

In fact, the evidence already suggests the opposite is happening. Costs for basic services at a hospital are often significantly higher than at an independent provider. For example, the charge for a basic MRI in a hospital setting is estimated to be between $1700 and $2200, while the same procedure at an outpatient imaging center is charged at $700-$1000.

Why so much higher? Two often cited rationales are: first, that the hospitals have greater overheads - so much for the synergies of scale - and secondly, that large hospital systems are able to negotiate better reimbursement rates due to their size. Even if they could reduce the cost to treat, why would the hospital feel compelled to shrink their margin by lowering their reimbursement rate? Research from Northwestern University showed that prices were increased by about 40% after the merger of neighboring hospitals.

Another possible reason for such high cost is that the rates quoted from the chargemaster bear little or no relation to the costs incurred to provide service. The justification for the amount in the chargemaster is opaque. The lack of transparency allows hospitals to charge cash-paying patients (those who are uninsured or wealthy medical tourists) whatever they want. This figure is not connected to either the costs incurred or the amount negotiated - increasingly from a position of strength as the only provider in the community.

Hospital systems have a poor track record of creating value from acquisitions and consolidation. They haven't successfully integrated physician practices, nor have they leveraged their scale to reduce their costs and manage their overhead allocation. This is largely because nobody has held them accountable. As long as there continues to be a lack of transparency about not only what they charge but how they calculate these figures, they will continue to create fantastic numbers for inclusion in the chargemaster and use their dominant market position to defend their reimbursement levels.

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