Commentary, Health Economics

COMMENTARY: Bigger Is Not Always Better: The True Impact of Hospital Mergers

Richa Upadhyay, Stanford University

Most people can name the nation’s most prominent health systems such as Kaiser Permanente, Mayo Clinic, and Trinity Health. Hospital mergers and acquisitions continue to make the “household names” of healthcare stronger, but such consolidation often comes at the expense of consumers. More often than not, hospital acquisitions fail to improve health outcomes while raising costs for patients and payers due to decreased competition. It’s time to determine once and for all whether these large health systems are actually giving patients bang for their buck.

American antitrust laws have historically failed to prevent hospital “monopolies” from charging high prices. Researchers from Health Affairs, a peer-reviewed healthcare journal, report that there is “mounting evidence” of the impact of hospital consolidation on competition, and therefore, “having an effective antitrust enforcement framework is imperative.” Consolidation is often broadly marketed as an opportunity to increase the efficiency of healthcare and reduce costs through economies of scale, but studies have shown that the primary objective of most mergers is to increase bargaining power with payers, which prevents such efficiency gains from being realized.

The Federal Trade Commission (FTC), which currently regulates and reviews hospital mergers, is unable to effectively enforce antitrust laws because the healthcare space has become increasingly concentrated; in fact, research suggests that 90% of American healthcare markets are overly-concentrated. Moreover, between 1994 and 2000, there were roughly 900 hospital mergers, and the FTC lost all seven of their cases attempting to prevent them. As of 2015, the FTC has only been successful in preventing three hospital mergers.

Perhaps the most notable consequence of hospital acquisitions is the increase in prices created from the anti-competitive environment. Prices increase partly because of stronger “hospital bargaining positions with insurers,” which can give larger hospital systems the chance to shift services to “higher-cost facilities.” The FTC has found that hospitals that have merged charge up to 40-50% higher prices than if they had not consolidated. The increase in prices holds true across different geographic areas and data sources, and has even been found to apply to non-profit hospitals.

An infamous example is Sutter Health, a non-profit health system headquartered in Sacramento, California that operates over 200 clinics and 24 hospitals. Over the years, Sutter Health has emerged as one of the most powerful health systems in Northern California, eliminating competition and hiking up prices. In fact, physician services in Sutter-dominated markets cost up to 20-30% more than comparable services in Southern California, where Sutter doesn’t have a prominent presence. 

In a recent anti-trust case, UFCW & Employers Benefit Trust v. Sutter Health, Sutter was found to be illegally increasing hospital prices. In 2019, Sutter Health agreed to pay $575 million in financial damages due to their “anti-competitive business practices against consumers and employers.” California’s then-Attorney General Xavier Becerra asserted that Sutter used its market power to raise costs and premiums for patients. Complaints against Sutter targeted the Cartwright Act, an antitrust law in California that specifically bans agreements that would support anti-competition efforts.

Sutter was able to maintain its dominance in healthcare through several problematic contracting practices. For one, Sutter almost always included all-or-nothing contract provisions. This means that “if any hospital is included in a provider network, then all facilities in that health system must be included in the provider network.” Additionally, they integrated gag-clauses, which limit price transparency by preventing the “disclos[ure] of prices for healthcare services…before the service is utilized and billed.”

The Sutter case placed healthcare systems nationwide under greater scrutiny and will hopefully help bring large hospital mergers to the forefront of the health policy agenda. Hospital consolidation has become more prevalent over the last few years, as many hospitals have struggled to stay afloat while facing revenue losses from delays in patient services and cost increases from the COVID-19 pandemic. Although the Coronavirus Aid, Relief, and Economic Security (CARES) Act granted billions to providers to compensate for these revenue losses, KFF notes that this “financial assistance to providers may not be sufficient to prevent an increase in the pace of consolidation” because the grants weren’t targeted to the most vulnerable and the revenue disruption was more impactful.

There is a definite need for better and stronger antitrust legislation in the healthcare space. Although far from perfect, SB 977, a proposed bill in California, offers a useful blueprint. Under this bill, the state attorney general would be allowed to reject a healthcare merger unless it significantly improved the chances of clinical integration or the likelihood of increasing access to services for an underserved population. Beyond enhancing the attorney general’s transaction review authority, the bill also proposed the creation of a new Health Policy Advisory Board to offer additional support to the attorney general. Despite failing to pass in 2020, the bill would undeniably have been a bold move to strengthen antitrust enforcement in the state.

Ultimately, it is becoming increasingly important to regulate hospital and provider consolidation, as it not only drives up costs, but can also worsen quality of care. Although there is no single solution to this consolidation conundrum, one thing is certain: When it comes to healthcare, bigger is not always better.

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