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Contrarian CEO: Consolidation Will Hike Spending

 |  By Philip Betbeze  
   August 23, 2013

Consolidation in the healthcare industry will do nothing to stop the upward march of spending. In fact, consolidation should exacerbate it. So says a hospital chief in a major market who shall remain anonymous—for now.

I talked to a CEO this week who has some surprising opinions about the overriding result we'll see from the wave of consolidation that's sweeping through healthcare.

Though improvements in quality of care and care coordination, as well as elimination of waste, are often the first benefits cited by CEOs who are attempting to put a hospital or health system merger together, this guy happens to think those are all secondary. In short, he thinks it's mostly about the profit motive and regional monopolies.

Take that, Federal Trade Commission. Here's one hospital CEO who says consolidation is going to do nothing to stop the inexorable march of healthcare spending higher and in fact, should exacerbate it.

This CEO, who will remain nameless until our 2013 HealthLeaders 20 are unveiled in December, reflects but one opinion among many differing ones in healthcare, and indeed, his opinion is shaped by his own local market, where the variables that determine reimbursement are as different from one area to another as annual rainfall amounts.

His opinion is also shaped by the fact that he is, relatively, as head of a standalone hospital in a major market, a minnow swimming in a sea of barracudas, and trying to compete for a slice of the same reimbursement pie—at least on the commercial side.

The fact is that some hospitals and health systems can reap reimbursement as much as 50% higher than a competitor with similar quality and outcomes results, simply because it has a network insurers feel they can't do without.

So what's wrong with that? Make sure your customers can't do without you, and charge them accordingly. That's capitalism.

Of course that's a dramatic oversimplification of the highly complex beast that is healthcare. Healthcare is different from other markets in that it's near-impossible for those who are making treatment decisions, (customers) especially if they're patients, to make any kind of value comparison, and thus, choose the lower cost option—even if quality and outcomes are similar.

If Panasonic wants to sell me a TV at 50% less than Samsung, and it has similar quality, that's easy for me to discover and to make a decision on whether that extra 50% for the Samsung is well spent. Consumers, and with certain exceptions, employers, can't make that call, and insurers aren't helping them much.

This CEO's argument, which holds a lot of weight with me, is that the lack of transparency in healthcare means that all the demonstration projects, all the cost-cutting exercises, indeed, all the vertical and horizontal consolidation going on in healthcare won't lead to lower prices.

Obviously, whether or not the CEO I interviewed is right remains to be seen, but he makes compelling arguments that the trend bears further examination before we conclude that consolidation in healthcare is “good” for patients or “good” for our country.

On a macro scale, healthcare's already squeezing out other competing priorities that we all must pay for, in one way or another, such as food, shelter, defense, education, and other spending priorities.

For instance, this CEO contends, insurers, at least in his market, aren't really that interested in lowering the cost of healthcare because they've been content to pass higher costs onto their clients: large employers, and increasingly, patients themselves.

Hospitals and health systems are precluded, through contractual “gag” orders, from disclosing what they are paid by commercial insurers for a variety of procedures. Not that most of them would be willing to disclose their reimbursement even if they weren't contractually prohibited, he claims, because the biggest and most comprehensive are getting sweetheart deals because of their negotiating clout.

As head of a major employer himself, this CEO finds this particular prohibition unfair and contends it inhibits his ability to offer his employees fair wages and benefits, never mind the cost to our nation as a whole. As competition recedes, prices go up. And healthcare consolidation is no different than any other industry consolidation. The consumer pays.

He's not sitting still for it. In fact, he's working on a dramatic way to shine the light on insurer negotiations with health systems and the results they bring.

From an economic standpoint, the transparency in pricing for employers and employees and insurers is in the crosshairs of affordability in healthcare, he told me..

Makes sense to me. We have the Patient Protection and Affordable Care Act, like it or not. If anything, the cost of healthcare will likely continue to rise as the PPACA is implemented, and many on both sides of the debate on federal healthcare reform have long derided the “affordable” claim in the Affordable Care Act.

Truly affordable care requires transparency. Despite the ACA, there's still precious little of it in healthcare now. Where are the lawmakers when you really need them?

Philip Betbeze is the senior leadership editor at HealthLeaders.

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