“The [Advocate-North Shore] case shows the agencies are willing to go to court unless parties have strong arguments that consumers will benefit from the merger.”
former Policy Director, Federal Trade Commission
Business consolidation is not new. It’s both a revered and a reviled part of our history. It’s what Carnegie did to control the steel market; Ford and Alfred Sloan (General Motors) to control autos; Vanderbilt to control railroads, J.P. Morgan to control banks and, of course, Rockefeller to control the oil market. What these “Robber Barons” accomplished years ago is being applied by their present-day successors. Think of airlines and telecoms for two prominent examples. To the list of consolidated industries, we are witnessing the creation of a new healthcare market.
Aetna, Humana, Anthem, Cigna, they’re all in merger/acquisition mode. Pharmaceutical manufacturers continue to merge, medical device manufacturers merge and tax-invert (Medtronic/Covidean). Just two PBMs now control two thirds of the employer-sponsored prescription drug market, and the largest insurance brokers and consulting firms have recently consolidated to the extent that the iconic 100-story [former] Sears Tower in Chicago now bears the name of a giant insurance producer. Hospital mergers alone, valued at a staggering $438B, represented 14% of the dollar value of all mergers and acquisitions in 2015.
Hospital consolidation will certainly continue. An additional 20% of U.S. hospitals will likely seek a merger by 2020, according to the Journal of the American Medical Association (“JAMA”). Already, of the 306 geographic healthcare markets nationwide, none is considered “highly competitive,” and about half are “highly concentrated” according to Marty Makary, M.D., professor of surgery at Johns Hopkins University School of Medicine.
So where does all this healthcare consolidation leave your corporate health plan? Probably not in a good place when it comes to patient access, provider choice, price competition and appropriateness of treatment.
Proponents of hospital consolidation argue that treatment quality improves when system-wide protocols are applied. However, JAMA’s studies show that, improvement in treatment outcomes is much more associated with hospitals in competitive markets than in markets dominated by a single hospital system. There also is over-utilization of hospital services in areas where there isn’t meaningful provider competition. At least some of the increased utilization comes from hospital system financial incentives for doctors to refer patients for more care within the systems.
Despite economy of scale opportunities in consolidation, the reality is that market power translates into pricing power (i.e. the power to increase prices). According to PwC, “Studies suggest that consolidation in concentrated markets can drive prices up as much as 20 percent.” To see this pricing power and more in action, we turn our gaze to the west.
The Bay Area encompassing San Francisco and Silicon Valley is not only home to Facebook, Google and Apple, it is also home to one of the nation’s largest and most dominant hospital systems. We’re talking about Sutter Health, a consolidation of 24 hospitals, 34 surgery centers and more than 5,000 physicians. It reported $11 billion in revenue last year (by comparison, the Cleveland Clinic reported $7.2 billion). Its average prices are alleged to be 50% greater than other Bay Area hospitals and 38% greater than those in Los Angeles, which has a much more competitive healthcare market.
Sutter is being sued by the United Food and Commercial Workers for abusing its market power to charge high prices. In response, Sutter is demanding that if an insurance carrier or self-insured employer wants Sutter’s hospitals and doctors to be in their networks, they must forego their right to sue Sutter, and instead agree to arbitration of disputes. This is seen as a way to keep carriers and self-insured employers from joining the union’s lawsuit. If a carrier or self-insured employer doesn’t agree to give up its right to sue, Sutter will demand that it pay 95% of billed charges. Carriers and employers have until May 16 to decide.
Sutter is so big that any insurance company or self-insured employer will have a tough time selling plan members on a provider network that doesn’t include it. This is not “California Dreaming.” “This is an important legal case because it could have national repercussions,” said Glenn Melnick, a health care economist at the University of Southern California. “Sutter is the model for the rest of the country, and there are so many other health systems doing similar things so they can raise prices.”
Major insurers have split over Sutter’s muscle-move. Anthem and Aetna are urging customers to accept the arbitration requirement to keep Sutter in their networks, while Blue Shield of California opposes Sutter’s request.
On the flip side, is the concern of providers that insurance carrier consolidation is a threat to their financial health. These concerns are playing out in a large merger proposed by Advocate Health Care and North Shore University Health System in Chicago. The merger would join Advocate’s 12 hospitals with North Shore’s four hospitals. If completed, it would be the largest integrated healthcare delivery system in Illinois. Hospital officials say the deal would give them greater bargaining power against Blue Cross and Blue Shield of Illinois. David W. Johnson, CEO of 4sight Health, said “The 500-pound gorilla is not Advocate-North Shore. Rather, it’s Blue Cross and Blue Shield of Illinois, which controls almost 75 percent of metropolitan Chicago’s commercial insurance market.”
Acting as the free-market businesses they have become, hospitals, insurance companies and the other mega-participants in the healthcare marketplace will act in their own best interests. Unfortunately, plan sponsors, the ones who are paying for all of this, aren’t part of the health market consolidation discussions.
So, how are plan sponsors going to protect themselves and their plan members from the increasing market power of the major healthcare players? Maybe coalitions can help. But history has shown that even with “strength in numbers,” employers have generally been unwilling to fight provider consolidation – at least not in the region of their headquarters.
Enter the U.S. Federal Trade Commission (“FTC”), whose role it is to protect consumers from anti-competitive practices. Long thought to be insufficiently assertive in the healthcare area, the FTC is attempting to block the Advocate/North Shore merger, and has recently succeeded in blocking similar hospital mergers in Idaho, West Virginia and [Toledo] Ohio. The FTC is also examining proposed insurance carrier mergers. As a benefits manager, you may be wary of the notion, “We’re from the government and we’re here to help you.” But maybe in the case of the FTC, it will be different. According to Forbes magazine, the FTC’s intervention in the Advocate/North Shore merger “could be a problematic sign for the rest of the rapidly consolidating U.S. healthcare industry.” Next up? Aetna/Humana, Anthem/Cigna and Walgreens/Rite Aid.
What will it take for healthcare to be a customer-driven market? One route is lobbying. Another might be to support the growth of independent, and potentially, disruptive technologies, service models and organizations.