Massive Momentum for Mega-Mergers in Health Care
Paul Keckley of Navigant Consulting summarizes the rapid pace of consolidation within U.S. health care:
“Go big or get out” seems to be a mandate across the health system these days. Across the continuum of healthcare products and services, consolidation is a given. Consider:
- Total enrollment of the top 10 insurers increased from 20% in 2003 to 46% in 2011
- The share of total revenues for pharmacy benefits management services for the top 2 Pharmacy Benefit Managers increased from 27% in 1999 to 61% in 2012
- The numbers of physicians practicing in groups of 5 or fewer physicians decreased from 66% in 2001 to 51% in 2012, while physicians in groups of 100 or more increased from 3% to 12% in the same period
- The employment of physicians in medical practices owned by hospitals increased from 24% in 2004 to 49% in 2011
- The numbers of hospitals in multi-hospital systems increased from 53% in 2003 to 60% in 2013.
Keckley’s article has a business angle. He points out that a staple of business school case studies is failed mergers. Nevertheless, most mature industries (e.g. airlines, accounting firms) consolidate rapidly and thoroughly.
Health care has seen a wave of mergers before. Back in the 1990s, policies favoring Health Maintenance Organizations (HMOs) led to both horizontal and vertical consolidation. The vertical consolidation (hospitals buying physicians’ practices) largely unraveled as hospitals realized that they had overpaid for medical practices in which physicians and patients failed to respond adequately to the incentives hospitals presented to them — and that showed in hospital systems’ finances.
A similar thing is happening today. This blog has frequently examined hospitals’ rolling up physicians’ practices. We’re not sure the pure economics are different than they were in years past. However, the policy environment is very different. Through Obamacare, the federal government has finally succeeded (for the time being) at turning health care into a system of regulated utilities.
Our general conclusion at this blog is that novelties like federally recognized Accountable Care Organizations (ACOs) are largely camouflage for hospitals who acquire physicians’ practices in order to arbitrage in-patient and out-patient fee-schedules.
In a properly functioning market, this would fail as physicians themselves bundled and rebundled services in response to patients’ direct demand for value. Outside concierge medicine, that possibility is receding due to Obamacare.
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For years public health policy wonks touted hospital employment of physicians as being important for quality and efficiency. These self-proclaimed experts argued that hospitals coold force doctors to practice medicine in cost-efficient ways. Hospitals could force physicians to engage in quality initiatives. Only hospital-employment could educate physicians about best practices and force them to follow these practices.
The one thing missing in this argument was that hospitals are not competing on price and quality. Thus, employing physicians was never about being more competitive. Hospitals employing physicians is about controlling more of the production line.
Physicians resisted having a boss for many years. They preferred the autonomy of being self-employed. In the end, young physicians decided working for hospitals was fine if that meant working regular business hours without the need for the huge billing staff. Hospitals could bill higher rates for physician practices (since it’s owned by the hospital). Further consolidation means more leverage with private insurers. We’ve often said that too much energy is expended in finding ways to maximize revenue against third-party reimbursement formulas. Too much of the recent trend of buying physician practices and consolidating is about precisely that.