Many health systems have used hospital consolidations or physician group acquisitions to grow and compete. But these actions often come at the expense of rising healthcare and insurance costs for patients, says the AHIP.

It would seem obvious that the continued pandemic is driving up healthcare costs in America. But there may be other significant factors at play, including the ongoing trend of hospital consolidations, mergers, and acquisitions (M&A).

Many health systems have been joining forces over the past few years, or simply acquiring smaller hospitals that are facing financial hardship. Traditionally, health systems look for complimentary systems or hospitals that fill in gaps in their services and resources. But they also look for low-hanging fruit—too-good-to-pass-up opportunities that present themselves.

Such consolidations are usually intended to drive costs down. But whether that is the case or not, savings aren't being passed on to the typical consumer, argues David Allen, a spokesperson at AHIP (America's Health Insurance Plans) trade association.

If Allen is correct, that is bad news. This trend is a main factor in the growing healthcare costs for the typical American, he says, and it shows no sign of slowing.

"Hospitals continue to consolidate. Even the pandemic did not significantly slow this trend," Allen says. "A number of experts are predicting a further increase in the rate of such consolidation post-pandemic."

Allen takes issue with arguments by some that consolidations or M&A lead to savings across the board.

"Hospitals have long promised such benefits. Unfortunately, studies (cited in AHIP's resources) have shown that these promises have not been realized. Therefore, it is unwise to allow the certainty of higher costs from anti-competitive hospital mergers based on the unrealized promise of efficiencies and improved care," Allen stresses.

It's not just health systems and individual hospitals that are targets. Just as attractive for acquisition are physician groups.

"Hospital consolidation is a main factor driving up healthcare costs for hard-working Americans. And hospitals continue to put profits before patients by buying up physician practices," Allen continues. "When hospitals increase market share through physician practice acquisition, they can control referrals and demand higher prices, which, in turn, makes premiums and costs for everyone even higher."

The AHIP is not alone in this view. As recently noted in a statement by the director of public affairs for the Federal Trade Commission, "Too many hospital mergers lead to jacked up prices and diminished care for patients most in need."

Consolidation and acquisitions are just what the doctor order, says EY

Should we be worried about the continued trend of hospital consolidations and physician group acquisitions? Not at all, says consulting firm Ernst & Young (EY).

"As hospitals increasingly face significant margin challenges driven by an ever-increasing cost of care and a relentless pressure to reduce reimbursement for those care costs, M&A has an ever-important role to play," EY noted of the barometer findings. "In fact, only the largest hospitals, with operating margins averaging 6.6%, have comparable margins to the largest US payers (which ranged from 5.0% to 8.1% in 2019). The rest of hospitals actually had negative operating margins in 2019."

EY recently completed its Global Capital Confidence Barometer, which looks at the number of healthcare executives that are, or are contemplating, doing a M&A in the next 12 months. The barometer did show a decline in consolidations during the current pandemic surges, but the firm expects the number to pick up again as we emerge from the pandemic.

Even in good times, the healthcare industry is under tremendous pressure to keep costs down while keeping patient care and patient satisfaction up. COVID-19 made everything much worse, says Simon Joyeux, EY's U.S.-East health sciences and wellness strategy and transactions leader.

"Everyone's fighting for resources. There isn't a level playing field, and there are a lot of players in and outside the industry that are trying to change the way we deliver healthcare," Joyeux explains. "COVID added more pressure. So, can the industry stay the way it has been, or is M&A the prescription that will help those hospitals continue to be competitive?"

EY believes that is the case, and the consulting firm says there are three factors that could make consolidations or mergers more appealing going forward:

• Hospital margins are shrinking 
   
• Vertical integration between payers and providers 
   
• The need for hospital systems to scale to compete 

Patient care hasn't improved with this trend, despite many promises

The bottom line on whether a trend is beneficial in healthcare or not is, ultimately, how it impacts patients. And by that measure, hospital consolidations and physician group acquisitions are just plain bad medicine, Allen stresses.

"Patient care does not appear to have improved as a result of consolidations. Moreover, the proposition that hospitals should be allowed to gain market power and increased prices based on unproved promises of better care is problematic," Allen says. "Our members have worked, and continue to work, with hospital and physician partners on approaches to improving care and efficiency that don't require anti-competitive consolidations."

But one might assume that when health systems merge, they can simplify many operational practices that should produce cost reductions, right? Apparently not, according to the AHIP.

"According to one study, hospital consolidation has been linked to average annual marketplace insurance premiums that are 5% higher than those in less concentrated areas," the AHIP noted in an August 26 blog. Another study looked at hospital prices for those with employer-provided health coverage. It found that hospitals that do not have any competitors within a 15-mile radius have prices that are 12% higher than markets with four or more competing hospitals. When looking at the average amount of Americans' premium dollars that go to hospitals—a whopping 42%—that 12% hospital non-competition surcharge results in an average increase of over $1,000 per year for families and over $370 per year for individuals enrolled in employer-sponsored health plans."

It's a similar problem with physician group acquisitions, the AHIP explained in a separate blog. According to the association:

• Prices for services provided by acquired physicians increased by an average of 14.1%, concluded a study published by the Journal of Health Economics.
   
• "Vertical relations can be a way for physicians and hospitals to bundle their services together and charge insurers higher prices, according to research published by Health Affairs.
   
• "The average price for a given service was always higher when performed in an outpatient setting. Average prices also tended to grow faster for the same services when performed in outpatient settings compared to office settings," the Health Care Cost Institute found. 

Most organizations and individuals are leery of government intervention in industry dilemma, but that is exactly what is needed, Allen says.

"More enforcement by federal and state agencies is an important part of the solution," Allen says. "So, too, is increased enforcement against anti-competitive ways in which already-consolidated hospital systems exercise market power."