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Consolidation Comes with Benefits (and Costs)

By Philip Betbeze  
   October 16, 2013

"We're looking for opportunities to lower our cost structure while we lower our price point. That will enable us to make a profit," he says. "The other economic pressure at work here is that the organization that continues to deliver value—that is, that manages its price point lower while improving quality—is typically rewarded in the marketplace by attracting more and more business. We're facing what other industries have been facing for years—particularly retail. The current environment is asking us to behave similarly."

He argues that's in part because the consumer of care—the patient—is less insulated from the cost impact of their decisions than in the past. While many patients are far from influencing what health services they consume, it's clear that the federal government and, to a lesser extent, employers are forsaking the fee-for-service economic model and using evidence-based guidelines to affect consumption.

"There are more and more individuals who are feeling this price pressure, which means the individual has much more skin in the game," says Thompson. Couple that with cost pressures on government and the employer, "and with the cost of care approaching 18%–20% of GDP, that puts pressure on government and employers to the point where it becomes unsustainable."

Thompson says the merger with Dean—a network of clinics and medical facilities that provide primary, specialty, and tertiary care throughout southern Wisconsin—will work to lower costs because "consolidation and economies of scale allow me to control my internal cost because I have negotiating leverage with my vendors and can apply that to lowering my cost structure."

Thompson, who says he is excited to bring many aspects of Dean's model into SSM, says he doesn't expect the market for M&A to subside for a while. He sees consolidation accelerating as standalone hospital boards become more aware of their inability to compete, and, like Cosgrove, predicts that several big systems will end up dominating the provider landscape.

Meanwhile, the hospital industry continues to experience a degree of churn. "I'm always puzzled by the lack of equilibrium. You have Tenet acquiring Vanguard. Later we'll see them spin off assets in some markets, [and] those will be acquired by someone else who's striving to get larger in a particular market," he says. "They'll all still be trading assets even if you have the 'Big 12,' so to speak."

Monopoly concerns misplaced?

There is disagreement about whether the consolidation ultimately will lead to monopoly power within a few systems and thus no bending of the cost curve. Cosgrove, for one, discounts those concerns.

"When people ask me about that, I point out that right now 50% of our hospital bill is being paid for by the government, and what we get paid is fixed. You get roughly the same amount for gallbladder surgery, for example, in Boston, New York, and San Francisco," he says. "Everyone in Washington and the insurance industry says we'll get to 75% of the hospital bill being paid by the federal government. If that's the case, it will be hard to have a monopoly when you have prices that you don't have control over. Of that remaining 25%, some will be no-pay and some will have private insurance."

So will government as payer have the monopoly power, as is the case in many nations with single-payer healthcare?

"I haven't really thought about it like that, but I think that's exactly right," Cosgrove says.

CMS has its own projections about payer mix in the near to medium–term. CMS expects the total government share of healthcare spending (local, state, and federal) will reach nearly 50% by 2021, up from 46% in 2011.

Philip Betbeze is the senior leadership editor at HealthLeaders.

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