Health system consolidation: Can employer groups, brokers survive it?
Evidence suggests that consolidation among health systems leads to higher prices for services and stable or lower quality of care.
Health care systems have been buying up one another, and physician practices, at an alarming rate. The 115 announced health care system deals in 2017 was a record, with 2018’s 90 close behind.
This level of consolidation activity 2017 “shook the health care landscape,” said consulting firm Kaufman Hall, which produces an annual mergers and acquisitions review. “These tremors continued into 2018 and are beginning to fundamentally reshape the health care landscape,” KH said in its 2018 review.
Related: Health care M&A: 2019 starts off with a bang
The consolidation within the physician practice sector was no less titanic. Hospital systems acquired more than 5,000 standalone practices in 2015 and 2016 alone. Meantime, practices are also being swallowed up by UnitedHealthcare and other non-hospital enterprises.
Analysts tend to focus on two major outcomes of this consolidation craze: financial and quality of care. So far, evidence suggests that consolidation among health care systems leads to higher prices for services and thus costs to users, and stable or lower quality of care.
These trends are not the friends of two very specific groups: health insurance brokers, and employer groups created to negotiate better terms for their members with hospitals.
“It is frustrating,” admits Brian Marcotte, CEO, The National Business Group on Health. “Scale for the sake of scale leads to higher costs, and that’s what we are seeing. When we look at what actually happens when hospitals buy hospitals or physician groups, we see higher cost and price.”
One of the primary objectives of NBGH’s 435 enterprise level members–all of which are self insured–has been to negotiate better terms with medical providers. As consolidation creates ever larger health care systems, its members report that “consolidation has not led to the efficiencies you’d see in other industries. … Most report that costs went up or were unchanged. Very few saw them go down.”
Employer groups are promoting Centers of Excellence and encouraging plan members to seek care from top performing practitioners. But consolidation among hospitals can erode quality of care for employer plan members by bringing into an existing system underperforming hospitals and physicians, Marcotte says.
“Let’s say you have a 12-hospital system that dominates a market or several markets,” he says. “The health plan is looking to contract with eight higher performing hospitals, but not all 12. The hospital system’s negotiating position is, ‘You take the whole system or you don’t get any of our system.’ These are the tactics that go on when providers are dominating a particular market.”
The decline of bargaining power
Smaller employers that band together into health care purchasing groups lose negotiating power when consolidation sweeps through a market. Employer groups negotiate locally or regionally for terms for their members with hospital systems. Their cache is numbers: They guarantee a large number of patients in exchange for favorable terms.
But, says Den Bishop, president, Holmes Murphy, an insurance advisor, as the systems expand, the group’s bargaining power diminishes.
Meantime, consolidation among physician practices is driving costs up for plan members. Physicians are highly incentivized to merge practices and then sell to a health care system. “They want to get out from under the administrative burden and just practice medicine,” Bishop says. “As soon as they buy the practice, the hospital system goes to the insurance company and says, ‘Our contract rate is much higher than the physicians, so you will now pay us this rate.’ That rate gets passed on to the employer. By paying higher prices for physician services, employers are paying the acquisition price for the hospital.”
In Atlanta not long ago, a major health system purchased a large physician practice–and employer plan costs for those physicians increased 40 percent, says Suzannah Gill, benefits strategy consultant with EPIC in Atlanta. “Sadly, when hospitals buys practices, the hospital wins and the member loses,” she says.
The national movement toward greater price and cost transparency among providers faces a threat from consolidation, Marcotte and others say. As systems expand, “you see a reluctance to have a price listed in transparency tools,” Marcotte says. “They refuse to list their prices, effectively eliminating any real ability for a consumer to choose a cost effective site of service.”
Josh Luke, MD, a former hospital CEO who now writes and lectures on hospital system strategies, believes the transparency issue may prove to be a turning point battleground for hospitals.
“There’s a transparency movement uprising coming with overall health and cost,” he says. “That momentum will be tough for any market to turn away from. Pricing transparency may outweigh a monopoly’s ability to gouge employers.”
Broker adaptation
On the broker side, a major threat to traditional brokers comes from the hospitals themselves. As they expand, many are moving into the health insurance business.
“The hospital systems are moving quickly, while they still have the most money, to compete with insurers. They are becoming insurers,” says Luke. “The bottom line is that is the [hospital] model of the future is an insurance model.”
To adapt to this new model, brokers need to become advisors and consultants to their clients. Their role may revolve more around transparency, advising clients on negotiating specific terms with health care systems, guiding them through the opaque pricing lens hospitals have thrown up.
Longer term, the health care system as insurer could have a positive effect on plan design and cost, several experts agree. The insurance component of a hospital system benefits from a healthier patient population, on more efficient use of services and facilities, and on a leaner brick-and-mortar footprint. These systems will focus more on convenience for patients and on value-based cost structures, and will be more responsive to negotiating with large employer groups.
“If the hospital system becomes big enough, it can negotiate directly with employers,” Bishop says. “They don’t need the insurance broker. The great hope [for employers] is that the hospital companies become insurers and have an incentive to provide better quality at a lower cost. It is still a ways off. We are in the cocoon period right now.”
EPIC’s Gill agrees that hospital systems that branch out into insurance will seek to contain the costs of medical care. “Health care providers have an incentive to increase costs. Insurance carriers have incentives to reduce or maintain costs. So when a health system develops an insurance business, there are incentives for them to do things efficiently,” she says.
The broker/advisor can play a crucial role in a consolidating market, Gill and others say.
“Employers need advisors to guide them today. They are focused on running their business, so you are seeing more advisors introducing interesting, cutting edge practices to meet their needs,” she says. “Sometimes when you tell a provider or facility, ‘My client will pay on the spot and you won’t have to worry about collections later,’ [the health care provider] will take it. I see all of the changes as very good for the broker/advisor market. The market is evolving, becoming more complex, and that’s where employers turn to brokers for guidance.”
The overall effects of hospital consolidation in a major market “are probably indifferent to most forward-thinking brokers,” says Allison De Paoili, founder and owner, De Paoli Professional Services, San Antonio. “But in the smaller markets, where you have two health systems that merge, then you have a problem,” she says. “With no competition, there is no incentive to negotiate price.”
In the end, the final chapters on health system consolidation have yet to be written. The merger frenzy of the past two years is still working itself out. As hospital systems seek market domination, creative brokers, concerned large employers, and national organizations like NBGH are still developing their responses.
Pockets of positive physician practice and hospital system consolidation do exist, NBGH’s Marcotte says. The hospital-as-insurer places the parent company in a position to accept some of the risks, he says, and that’s where innovation and efficiencies will emerge. It’s mostly happening on the Medicare Advantage side, but could translate to commercial insurance, he says.
“What I worry about with provider consolidation is when I have the whole market, I have no incentive to move to a value based direction, unless I have to do it to get paid differently,” he says.
Total market domination may be the goal of health systems. But it could also be their undoing.
“When there’s a monopoly, people will walk away,” says Josh Luke. “People are getting fed up. The public pressure is starting to rival the doctor and hospital lobby. Major employers, like Disney and Amazon, are saying ‘We are gonna blow it up and start over.’ Hospitals haven’t started feeling the pain yet. But it’s coming.”
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