COVID-19, Market Consolidation, And Price Growth


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In 2018, Health Affairs launched the Council on Health Care Spending and Value. This nonpartisan, expert working group will develop recommendations about how the US could take a more deliberate approach to moderating health care spending growth while maximizing value. The council’s 22 members began their work in January 2019 with fact finding, studying the literature to identify areas of health spending—and spending growth—that are “excessive” and may be appropriate targets for policy intervention. 

Today the health care landscape in the US looks quite different than it did when the council first convened. While the COVID-19 pandemic has not changed the council’s mission, it has introduced new questions and added urgency to old ones. Spending on COVID-19 testing and treatment will represent an increase in total national health spending compared to 2019, but there has also been a decrease in spending on routine and elective care. The ultimate impact on spending growth overall likely won’t be clear for several years. In the meantime, however, some experts believe that the pandemic will accelerate an important dynamic that has been shown to increase prices and spending growth: market consolidation.

This post, the second in a series on the council’s deliberations, provides a view of the group’s inquiry into the impact of market consolidation on both price growth and spending growth. 

Market Consolidation And COVID-19

Between March 1 and June 30, industry groups estimate that hospitals and health systems lost more than $200 billion due to forgone revenue and increased COVID-19-related costs. Others estimate that primary care practices lost $15 billion between February and May due to a vast reduction in office visits and uncertainty around telemedicine payments. Some experts believe that these financial strains will likely lead to increased acquisition of independent provider groups and hospitals. Others have gone so far as to call the pandemic the “death knell” of private practice, barring intervention.

Early analysis suggests that the high volume of mergers and acquisitions in progress at the beginning of 2020 is unlikely to be impacted by the pandemic-induced recession. In the meantime, evidence continues to mount that consolidation nearly always leads to higher prices paid by private payers. Before reviewing this evidence, however, it is important to understand why some experts believe that prices play a particularly important role in the United States’ outsized health spending and growth. 

It’s Always About Price

Conceptually, changes in total spending over time can be attributed to a combination of changes in service prices and use patterns. Which factor plays a more important role in US health care spending and growth? The international literature provides some clues, revealing few major differences in use patterns between the US and lower-spending nations. Accordingly, many experts believe that higher US prices are to blame for the gap between total per capita health spending in the US and other nations. Or, in the now-famous words of Gerard Anderson, Uwe Reinhart, and their coauthors, “It’s the prices, stupid.”

But what do we know about the respective roles of prices versus use in driving US health spending growth? Again, it may indeed be the prices. Joseph Dieleman and colleagues estimated the contributions of various factors to increased health spending in the US between 1998 and 2013. They found that changes in price and service intensity accounted for fully 50 percent of increased health spending, although these could not be disaggregated. In contrast, changes in service use were not associated with any significant change in spending.

The supremacy of price is also supported by the work of the Health Care Cost Institute (HCCI), which found that between 2014 and 2018, US private insurer health spending per person increased by 18.4 percent, while per person use increased by only 3.1 percent. In contrast, there was a 15 percent average increase in prices for drugs, professional services, and hospital care. 

The Centers for Medicare and Medicaid Services Office of the Actuary sees price playing a similarly important role in US health spending growth, projecting (before the pandemic began) that from 2019 to 2028, personal health care spending growth will average 5.5 percent per year, with price growth accounting for almost half (43.0 percent) of that. Pre-pandemic research from Zack Cooper and colleagues suggests that—at least for the private sector—growth in hospital facility prices, more so than physician charges, is a concern, as the former had increased more rapidly than the latter.

Variation As A Diagnostic Tool

One helpful tool in understanding the contribution of price to spending growth is the identification of variations in prices and their growth across geographies. When we find outlier areas of prices or growth, we can look more closely at factors that might explain those differences. And it turns out that US health care prices vary tremendously, at least in the private sector—they vary far less in Medicare, where prices are set by regulation.

Cooper and colleagues found that US health spending per privately insured beneficiary differs by a factor of three across geographic areas, with half of that variation driven by price differences and half by differences in quantity. Looking more closely at prices, HCCI found large variations in commercial payments for common procedures in anesthesiology, radiology, and emergency department (ED) care. In one example, the average price of anesthesia for labor during planned vaginal delivery ranged from $672 in Pennsylvania to $1,825 in Florida. Price variation for an ED visit was even greater, ranging from an average price of $222 in Arkansas to $935 in Alaska. Furthermore, geographic variation did not follow obvious patterns, such as consistently higher prices in coastal cities.

Less is known about geographic variation in health care price growth. While additional research from Cooper’s team found more than 15-fold variation among hospital referral regions in total hospital spending growth over seven years, the researchers did not disaggregate spending into changes in price versus quantity. 

Consolidation Matter

So why might prices or their growth rates vary across geographies? Plausible—and partial—explanations include differences in: administrative overhead due to state and local regulatory factors; prices of health care inputs, such as salaries and supplies; practice style, with some geographies characterized by more service-intensive practice than others; and, relative market power of providers and payers, influenced by their respective levels of market concentration. 

Among these factors, market consolidation stands out as having a particularly strong connection to price variation and is also—at least in theory—amenable to policy intervention. There is clear evidence that health care provider markets have become increasingly consolidated in recent years, as measured by the Herfindahl-Hirschman Index. Cooper and colleagues examined 366 US hospital mergers and acquisitions between 2007 and 2011, finding that prices increased by more than 6 percent when the merging hospitals were geographically close, but not when the hospitals were geographically distant. In addition, prices at monopoly hospitals were 12 percent higher than those in markets with four or more rivals.

Highlights of the growing body of research linking provider market consolidation and price increases are summarized in exhibit 1.

Exhibit 1: Provider consolidation leads to higher prices

Study

Major Findings

Zack Cooper and colleagues, 2019

Among 366 U.S. hospital mergers and acquisitions between 2007 and 2011, prices increased by over 6 percent when the merging hospitals were geographically close, but not when the hospitals were geographically distant

Leemore Dafny and colleagues, 2019

Between 1996 and 2012, within‐state hospital mergers yielded price increases of 7%–9 % for acquiring hospitals. There were no significant increase for out-of-state acquisitions.

Daniel Austin and Laurence Baker, 2015

For 15 common, high-cost procedures, private PPOs paid physicians 8 to 26 percent more in counties with the highest average consolidation for physician groups, compared to counties with the lowest average.

Laurence Baker and colleagues, 2014

Vertical consolidation (hospitals purchasing physician practices) increases hospital prices paid by private insurers.  From 2001 to 2007, a one-standard-deviation increase in the market share of hospitals that owned physician practices was associated with significant increases in prices and spending of 2–3 percent.

Cory Capps and David Dranove, 2004

Consolidation enabled hospitals to increase prices in three of four markets studied.

Source: Authors’ analysis.

Value Is The Flip Side Of Consolidation-Driven Price Increase

Council members generally agreed that high, varied, and rapidly increasing health care prices are concerning if high price is not associated with better quality or value. In fact, some evidence suggests that higher prices resulting from consolidation do not signal higher quality, but there is a need for additional study. 

Taken together, though, the body of research on price variation suggests that there may be opportunities to reduce health spending by reining in some private payer prices—and that post-consolidation price increases may be a target of opportunity. The difficulty is in discerning when such price increases are associated with better value. If, for example, prices go up, but improved clinical integration leads to reductions in unnecessary use (fewer repeated tests, and so forth), value increases, and total spending may be moderated. Consolidation could have such an impact when it involves clinical integration and associated investments in quality and care coordination. Some council members cautioned, however, that “true” clinical integration is difficult between formerly competing hospitals or between a hospital and a newly acquired physician group, as disparate business cultures can be a barrier.

Consolidation can also improve value when it is associated with economies of scale, if freed-up resources are directed toward value-producing activities. While economies of scale—in everything from regulatory compliance, to laundry services, to cyber security—are often a promised benefit of provider mergers and acquisitions, it is not clear that providers’ internal per patient costs actually fall post-consolidation. 

Council members also discussed other ways that consolidation can improve value despite price increases. For example, consolidation can result in the preservation of access to care, such as in rural areas, where hospital consolidation may be the only alternative to closure. And finally, when consolidation leads to the regionalization of certain services—those for which higher volume is associated with better quality—there is an improvement in value.

Stepped-Up Antitrust Enforcement Is Not The Only Tool In The Toolkit

With the number of provider mergers and acquisitions occurring at lightning speed, most council members did not think that trying to slow or stop them through antitrust enforcement is the answer to rapid price growth. Instead, some expressed interest in policy interventions that would trigger additional scrutiny if rapid post-consolidation price growth occurs. Policy makers could consider tools such as rate regulation or prohibiting “must-have” hospitals from using increased market power to remain outside insurance networks.

In short, rather than intervening around consolidation per se, it could be helpful to have a means to look for post-consolidation price increases, determine whether they are associated with improved value, and take steps to limit them after the fact if needed. Admittedly, many of these post-consolidation tasks would likely be beyond the capacity of federal regulators as currently structured; a new advisory or regulatory body might be needed.

Beyond Consolidation

Some council members noted a need for research into the “dose-response” relationship between consolidation and recent trends in private-sector price growth. For better or worse, the pandemic may provide a plethora of opportunities to study this relationship. While most agreed that post-consolidation price increases bear further scrutiny, none believed that consolidation can explain all of the recent price growth, which far outpaces the rate of total health care spending growth. The concluding sentiment was that stakeholders in the health care system need to be equipped to push back when prices are out of line. 

Authors’ Note:

This post is intended to capture the flavor of the council’s conversation but does not represent consensus nor should specific opinions be attributed to any individual council member. Any opinions expressed are those of the authors.


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