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Consolidation in health care, small players (MDs, groups, hospitals) being acquired, employed, or partnering with larger hospitals/networks, is a trend most in the industry are comfortable with by now.

ACA Driven Consolidation: Cost Savings or Price Increases?

Consolidation in health care, small players (MDs, groups, hospitals) being acquired, employed, or partnering with larger hospitals/networks, is a trend most in the industry are comfortable with by now.  Driven by large organizations seeking to improve their infrastructure and technology base, grow their market share, achieve economies of scale to reduce costs, and, for smaller groups/private MDs, secure their incomes and future in the industry, the trend has continued to accelerate over the past several years. This consolidation facilitates the ability to both reduce costs through economies of scale and the participation in the Affordable Care Act’s (“ACA”) risk sharing payment models and, through an unintended consequence, also to increase costs due to increasing market share and negotiating clout against private insurers.  

The ACA has contributed to and accelerated the consolidation trend in the industry since 2012 as technology and reporting requirements are costly and cumbersome, particularly for smaller players lacking the appropriate infrastructure to navigate the changing times.  In addition to increasing access to health care, the goal of the ACA reform is to reduce the growth in health care costs while increasing quality. This goal is aimed to be achieved by shifting the payment model from typical fee-for-service to a variety of risk sharing models, beginning with Medicare. Initial experience from the ACA’s Pioneer Accountable Care Organizations does show promise in the ability to control costs while maintaining quality.  

However, a consequence of consolidation and increasing market share for larger players is stronger negotiating leverage for large systems against private insurances. While Medicare can hold payments stable without the need to negotiate, private insurers and rates are subject to more typical supply-and-demand market factors. Consolidation, and the reduction of competition in marketplace, is working to enable large systems to negotiate and drive costs higher. 

As an example, a 2016 Becker’s Article states that  “Post-acquisition, hospitals have been known to hike prices significantly. For example, an analysis performed by a Federal Trade Commission economist revealed that San Francisco Bay Area hospitals Summit and Alta Bates increased prices by 28 percent to 44 percent after merging in 1999.” 

These cost increases are offsetting progress or benefit realized by reduced costs from Medicare’s risk sharing models. Only time, and politics, will tell which model and lever will ultimately win out across the entire health care delivery system. 

 

Tyler Tracewski is a Health Care Services Group Manager, assisting clients with strategic and financial planning, development and integration of financial modeling tools, and overall practice management.

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