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Wednesday, February 19, 2014

Uptick in Hospital Mergers: A Doubled-Edged Sword for Consumers

Kim Bailey

Health System Improvement Program Director

Kathleen Stoll

Director of Health Policy

Earlier this month, a federal district court judge in Idaho examined whether a merger between a large hospital system, St. Luke’s, and the state’s largest independent network of doctors would create monopoly conditions. This proposed merger underscores a growing trend in the health care industry: because it’s easier and more cost effective to coordinate patient care when hospitals, specialists, and primary care doctors are part of one unified system that is financially and clinically integrated, we’re seeing more hospital and provider groups merging. This isn’t surprising, as the Affordable Care Act includes a number of incentives to encourage health care providers to coordinate care between each other and across care settings. We know that, when providers work together, they improve the quality of care and health outcomes, and they may save money, too.

Mergers increase market share for hospitals and health systems and drive out competition

But here’s the concern with merging hospitals with provider groups: While integrated health systems make it easier to coordinate health care across providers, they may also drive out competition between hospitals and among specialists, and drive up prices. As hospitals and provider groups merge, the number of competing health care providers in the market shrinks. If a health system becomes so large that it has an unfair advantage in the market, it may be able to demand higher payments from health insurers. These insurers, in turn, pass these larger bills on to consumers in the form of higher monthly insurance premiums.

Idaho case spotlights the tension between hospital-led consolidation and monopoly market power

When the federal judge in Idaho reviewed the Idaho/St. Luke’s merger, he ultimately ruled against the merger on the grounds that a merger between a large hospital system, St. Luke’s, and the state’s largest independent network of doctors would create monopoly conditions in the state, thus violating federal anti-trust laws.

In his opinion, the judge noted that the merger would likely improve coordinating care and overall health outcomes in Idaho. But he decided to stop the merger because he believed that allowing it to proceed would grant the hospital system too much market power, allowing St. Luke’s to demand higher prices and harm consumers by pushing up the cost of care and health insurance. St. Luke’s is appealing the decision.

Hospital-led health system consolidation is happening more frequently 

While the trend toward the creation of more integrated health systems is not new, the rate at which mergers and acquisitions are occurring is increasing.

A recent article in the Journal of the American Medical Association analyzed this trend and found that 60 percent of hospitals are now part of a health system. Between 2007 and 2012, 432 hospital mergers and acquisition deals were announced involving 835 hospitals.

The proportion of physician practices owned by hospitals is also increasing rapidly. Between 2004 and 2011, the percentage of physician practices owned by hospitals more than doubled, rising from 24 percent to 49 percent.

On a related note, today’s Morning Edition segment on the correlation between high premiums in the new insurance Marketplaces and provider market power highlights this issue. Listen here.