The Train Has Left the Station

Season 1: Episode 2

Many hospitals have spent the last 30 years buying up their competitors big and small. What have these mergers and acquisitions done to the cost and quality of care, and where do we go from here?

Listen to the full episode below, read the transcript or scroll down for more information.

The Overview

Just How Common Are Hospital Mergers?

0
mergers per year on average¹

3 out of 4

metro areas have hospital markets considered “highly consolidated.”2

What's the Impact of Hospital Mergers?

According to the hospital industry, mergers…

  • Cut costs by achieving greater scale and standardization
  • Improve the convenience and quality of care³

According to antitrust experts, mergers…

  • Increase prices (when competition decreases)⁴
  • Can sometimes modestly cut costs⁵
  • Do not have a clear effect on quality in either direction⁴

The Verdict: The bulk of the evidence shows that on average, mergers between hospitals lead to price increases without improvements in efficiency or quality.

Can Regulators Reign in Hospitals' Market Power?

Pros: By scrutinizing proposed mergers and challenging those clearly poised to increase prices, federal and state regulators can protect hospital markets from becoming even more consolidated.

Cons: This strategy only prevents the situation from worsening and can be difficult to execute because regulators have limited resources and the burden of proof is high. It can also be risky since an adverse ruling can set a precedent that stymies future cases. Additionally, not all mergers are required to be reported to federal antitrust authorities before they occur. Although deals can be retroactively challenged, competition may be affected before cases are resolved.

Pros: Even when consolidation has already occurred, state and federal officials can promote competition by preventing hospitals from engaging in anti-competitive business practices, such as using contracts with insurers to limit patients’ choices and increase costs.

Cons: This strategy, while important, faces many of the same constraints as litigation to block mergers. It is also somewhat unknown just how much of a direct impact these practices have on prices. In the case of nonprofit hospitals, the Federal Trade Commission is prohibited from addressing any anti-competitive practices, although state regulators and the Department of Justice can pursue these cases.

Pros: Highly consolidated hospital markets leave few options other than the regulation of prices through mechanisms like price caps or rate-setting. Requiring hospitals to cap payment rates or accept a set price would protect consumers from exorbitant bills and could lead to lower prices, depending on the rate defined by regulators.

Cons: Many states have attempted regulation of hospital prices but have had little success thus far. Not only is this strategy politically challenging, it is also logistically challenging for regulators who must determine the correct rate to pay hospitals for each individual service. Setting the incorrect rate can lead to unintended consequences, including constrained access to care and poorer quality of care.

The Outlook:  Preventing further consolidation will require state and federal authorities to continually identify and challenge potential threats to competition. In markets without competition, regulation — although difficult to pull off and problematic in other ways — may be the only path with real potential to bring down hospital prices on a significant scale.

  1. 2018 M&A in Review (KaufmanHall, 2018)
  2. Healthy Marketplace Index (Health Care Cost Institute, 2019)
  3. Hospital Merger Benefits: Views from Hospital Leaders and Econometric Analysis – An Update (Noether, May, & Stearns, American Hospital Association, 2019)
  4. The industrial organization of health-care markets (Gaynor, Ho, & Town, Journal of Economic Literature, 53(2), 235-84, 2015)
  5. Mergers and marginal costs: New evidence on hospital buyer power (Craig, Grennan, & Swanson, NBER Working Paper 24926, 2018)
  6. Gaynor, et al.

More Episode Resources

Research on Hospital Mergers and Market Consolidation:

California Attorney General Fact Sheet and Full Complaint Against Sutter Health (2018)

The Sky’s the Limit: Health Care Prices and Consolidation in California (Scheffler, Arnold, & Fulton, California Health Care Foundation, 2019)

Consolidation in California’s Health Care Market 2010-2016 (Petris Center at UC Berkeley, 2018)

Hospital Concentration Index (Health Care Cost Initiative, 2019)

FTC Retrospective Analysis of Sutter-Summit Merger (Steven Tenn, FTC, 2008)

Hospital Merger Benefits: Views from Hospital Leaders and Econometric Analysis (Noether, May, & Stearns, American Hospital Association, 2019)

Hospital Prices Increase in California, Especially Among Hospitals in the Largest Multi-hospital Systems (Glenn Melnick and Katya Fonkych, INQUIRY, 2016)

Examining the Impact of Health Care Consolidation (Martin Gaynor, Congressional testimony, 2018)

Comment from Sutter Health: 

“Sutter Health’s integrated network supports the goals of the Affordable Care Act by providing a user-friendly healthcare system centered around patient care — a system that offers greater access to quality healthcare at a lower cost. This connectivity allows Sutter teams to provide innovative, high-quality and life-saving care to more than 3 million Californians. This kind of connected care is also why the majority of hospitals and care facilities across Sutter’s integrated network outperform state and national averages in nearly every measure of quality.”

Episode Credits

Guests: Jaime King, Associate Dean and Professor of Law, UC Hastings College of the Law
Bob Town, Professor of Economics, University of Texas

Original music composed by Ty Citerman; additional music by Blue Dot Sessions and Lobo Loco.

Archival and additional audio courtesy of: KPIX 5, WBEZ Chicago, the WNYC Radio Archive, KCRA, KTVU, CBS Sacramento and the California Department of Justice.

Featured image courtesy of Lisa Aliferis.

Additional thanks to:
David Alvarez, Todd Callahan, Cory Capps, Zack Cooper, Mark Pauly, Leemore Dafny, Chris Garmon, Martin Gaynor, Molly McCrea, Glenn Melnick, Monica Noether, Barak Richman, Henry Su, Justine Tobiasz, Michelle Wiley and the Tradeoffs Advisory Board

…and our stellar staff!