A Very Weak Argument in Favor of Hospital Mergers
Earlier this week, I discussed the rapid pace of mergers throughout health care. Hospital consolidation is one point of special concern, because it can reduce competition and increase prices. In the Wall Street Journal, Dr. Kenneth L. Davis, MD, CEO and President of Mount Sinai Health System in New York City puts forward a number of claims in favor of hospital consolidation. Each is weak, making an unconvincing argument overall.
First, Dr. Davis asserts that the new goal of hospitalization is not to make any individual patient well, but “population health management”. Greg Scandlen has thoroughly challenged this as an appropriate goal. With respect to hospitals specifically, Dr. Davis’ theory of population health management leads him to conclude that “stand-alone hospitals have neither the number of patients to manage the actuarial risk of population management, nor the geographic coverage to serve a large population. Hence the reason for allowing strategic hospital mergers.”
Wait a minute: Actuarial risk is managed by insurers, not providers. When we talk about insuring buildings, we look to property insurers to take on actuarial risk, not construction companies. The latter have to manage engineering, budgetary, and other risks. Similarly, hospitals already have enough medical risks to manage, without expecting them to take on actuarial risk as well.
Second, Dr. Davis asserts many benefits of size, which we would call economies of scale and scope in business school. For example: “Combining smaller hospitals with large medical centers gives more patients access to top specialists.”
How, exactly does that happen? The buildings have not moved, so there is no physical improvement in access. Quite the contrary, America’s non-profit hospitals are notoriously unfocused, combining wards doing different things that would operate better as specialized “focused factories.”
An example of this is the Surgery Center of Oklahoma where forty surgeons perform certain surgeries, posted on a list on a website that anyone can easily find, day in and day out. They don’t deliver babies, provide chemotherapy, or do organ transplants. However, most such hospitals are owned by physicians, instead of non-profit corporations, so are discriminated against by federal and state laws.
Third, Dr. Davis claims that larger health systems better serve “community needs.” Specifically:
Critical services such as pediatrics, psychiatry and obstetrics, which often rely heavily on Medicaid for payment, can leave hospitals at a financial loss. In a successful merger, the reduction of back-office expenses and elimination of clinical duplication….. can allow several hospitals in the larger network to continue offering these services.
That sounds fair enough — except it contradicts another of the hospitals’ lobbying priorities: To expand Medicaid because it improves hospitals’ revenues. What is more likely is that larger hospitals are more able to develop sophisticated accounting that makes it impossible for outsiders to understand the true cost structure of various parts of the system. This enables hospitals to increase revenues, because third-party payers still rely more on cost-plus than value-added measurements to determine fees.
So, arguments in favor of hospital consolidation are weak. The question is: What is to be done about it? My own preference is that the Federal Trade Commission, which frequently examines hospital mergers for antitrust violations, keep out of it. Almost all hospital mergers are within one state, and state antitrust laws should be relied upon to respond to undue concentration.
Even better, forget about antitrust law at all and open the market to more choice. This would entail revisiting and repealing a whole swathe of federal and state laws and regulations preventing specialization and for-profit ownership of health facilities.
In graduate school I remember studying how in Britain the mercantilists all lobbied the government to grant them monopolies because competition was wasteful!
This sounds like a similar argument. This doctor is trying to justify the industry’s anti-completive behavior by using an economic argument that isn’t economically sound.
We need hospital consolidation to better manage population health? Except for immunizations for contagious diseases, population health can only be improved one person at a time.
The logic that hospitals need generous cross-subsidies to offset money-losing specialties ignores that cross-subsidies are inefficient.
Economics of scale? That’s not a bad argument. But, in health care economics of scale often passes for building a bigger behemoth because it can then justify a higher capital recovery.
A better strategy: let competitor peck away at the profitable areas of inpatient care. What left should be examined carefully to see if there isn’t a way to improve it.
Quite right. I don’t see hotels defining “population accommodation management” as grounds for a pro-consolidation policy!
John and Devon–
You apparently are not keeping up with the other side of the merger coin–Health plans are delegating risk to providers, as a form of incentive to reduce costs. So, if a provider organization is going down that road, it looks for some way to spread risk,just as the payer does…and that way is to acquire additional capacity and funds flow.
The forms of payment are also changing, so that it will no longer make sense to compare prices for single procedures, as bundled payments (hospital,physician and other providers) and capitation will substitute for fee for service charges. The concepts of “transparency” and of “choice” will not be what happens at the provider level–competition will be focused at the health plan level, where one compares premiums and deductibles.
And don’t forget, competition at the provider level requires more ethan one provider in the same service area and network that performs the same procedure. More commonly, the competition is for quality of care/reputation. Stanford is a popular provider, in fact, it is the only provider in the Palo Alto area, and it is very expensive. But people do not go up or down the 101 freeway to the lower cost hospitals because they know Stanford is the best.
You want healthcare to work by the rules of classical consumer economics, but it doesn’t.
Where price does matter is in buying services not usually covered by insurance, such as Botox, skin peels, and other cosmetic services. All are elective, schedulable, and data on prices of all the sellers is readily available.
By the way, Stanford’s prices are being challenged by Anthem Blue Cross right now, with encouragement by the Pacific Business Group on Health. All are ignoring the state-ordered seismic safety construction that Stanford had to do, for about $5 billion. The health plans want to silmply add a small percentage to charges as though the old trend line still prevails. It doesn’t. I’m serious, this is a change in the market that it does no good to ignore.
Luv ya, anyway..
Wanda Jones
San Francisco
Thank you, as always. We will see you these vertical acquisitions of physicians’ practices work out. I think it was you who told me that in a previous wave of acquisitions, the hospitals overpaid.
In terms of the horizontal consolidation, we will also see if diseconomies of scope and scale are greater than the risk mitigation. I think they will be. If they were for-profit businesses they would not need to do what they are doing, because risk would be diversified in the investors’ portfolio.