Martin Gaynor's presentation from "Supersized: The Rise of the Hospital Giants," a ReportingOnHealth.org webinar, 5.19.15 http://www.reportingonhealth.org/content/supersized-rise-hospital-giants

1. Consolidation and Competition in
US Health Care
Martin Gaynor
E.J. Barone Professor of Economics and Health Policy
Heinz College
Carnegie Mellon University
and
Former Director
Bureau of Economics, Federal Trade Commission
Supersized: The Rise of the Hospital Giants
Reporting on Health Webinar
USC Annenberg School for Communication and Journalism
May 19, 2015 1

2. Introduction
• The US relies on markets for the provision and financing (~1/2) of
health care, but...
– Those markets don’t work as well as they could/should.
• Prices are high and rising, there are quality problems, there’s too little organizational
innovation.
• Fragmented delivery system, need for coordination of care.
– Consolidation, concentration, and market power have a large part to do
with that.
• Markets are highly concentrated.
• More consolidation is happening.
– Matters for the ACA – depends on markets.
– Key role for antitrust agencies: enforcement, advocacy, research.
– Many other policy makers: Congress, CMS, HHS, State agencies,
legislatures.
• Organization of Talk.
– Evidence on the Effects of Consolidation.
• Benefits
• Harms
– Competition Policy.
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3. Potential Benefits of Consolidation
• Consolidation could lead to potential benefits (“Triple
Aim”).
– Coordination of care.
– Investment in care coordination, quality.
– Reduction of costly, unnecessary duplication.
– Achievement of scale.
• Costs
• Risk contracts.
• Volume-outcome.
• But, …
– Consolidation isn’t integration.
– Evidence doesn’t support the claims.
• Consolidation has not led to lower costs, better quality, or coordinated
care.
• If anything, just the opposite has happened.
• We have 30 years of experience with consolidation to draw on.
– Hospital mergers, Integrated delivery systems, physician practice mergers,
hospital acquisitions of physician practices,…
3

4. Evidence on Benefits of Consolidation
• Burns et al. (2013) – horizontal & vertical physician integration
– Most physicians small practices (2/3rds < 5 docs; 4/5ths , 10).
• Why, if bigger is better?
– Growing % in large (11+) groups, assembled by hospitals (~20% of docs).
– There are limited scale and scope economies in physician practice.
• Evidence doesn’t support large multispecialty practices better.
– Little evidence supporting efficiency of large, vertically integrated, multispecialty groups.
• Hospital acquisitions of physician practices may not result in greater efficiency.
• McWilliams et al. (2013) – effects of integration on physician group performance for Medicare
– Larger hospital based groups had higher per beneficiary spending, higher readmission rates, and
similar performance on process measures of quality.
– Larger independent groups performed better than smaller groups on all process measures, and had
lower per beneficiary spending in counties where risk sharing was more common.
• Weeks et al. (2010) – effects of integration on physician group performance
– Large multispecialty groups that were members of the Council of Accountable Physician Practices had
lower spending and better quality measures for Medicare beneficiaries (although differences weren’t
large).
• Hwang et al. (2013) – effects of integrated systems
– Most studies show association between integration and quality.
– Few showed reduced utilization or cost savings.
• Koch et al. (2015) – effects of hospital acquisitions of physician practices
– Acquired practices deliver more care in their system’s hospitals.
– Less likely to deliver care outside the system.
– Care shifts from office to hospital, spending increases.
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5. Evidence on Benefits of Consolidation, 2
• Goldsmith et al. (2015) – effects of integrated delivery networks
– Little evidence that IDNs have lower costs or higher quality.
– Growing evidence that hospital-physician integration has raised physician costs, raised hospital
prices, and per capita medical spending.
– Hospital integration into insurance not associated with shorter LOS or lower charges per
admission.
– IDN investment associated with lower operating margins and return on capital.
– Diversification into more business lines associated with negative operating performance.
– Few or no scope economies within health plans, hospitals, or physician groups, or between
them.
– Prominent IDNs (UPMC, Intermountain, Geisinger, Henry Ford, Advocate,…) don’t perform
better than non-IDN peers in the same market.
• Burns et al. (2015) – effects of hospital systems on costs
– Examine 4,000 US hospitals from 1998 to 2010.
– No evidence that system members have lower costs.
• Tsai and Jha (2014) – effects of hospital consolidation on costs and quality
– Merging can increase volumes, but that doesn’t necessarily improve outcomes.
– Integration of care requires clinical integration and data sharing.
• This is costly and hard.
• Large systems not necessarily motivated to share data outside the system.
– Larger systems better able to make investments in quality measurement and improvement.
• Little evidence to suggest smaller institutions can’t do this.
• Leadership more important than expensive investments.
• Not all quality interventions are expensive (e.g., checklists).
• EHRs are expensive, but small institutions appear to be keeping up.
– Evidence shows that competition improves quality. 5

6. Evidence on Benefits of Consolidation, 3
• Vogt and Town (2006) – effects of hospital consolidation on costs, quality.
– Combining facilities lowers costs, mere consolidation does not.
• Hospital closure, consolidating service lines
– Some evidence of substantial scale economies.
– Consolidation lowers quality of care.
• Gaynor and Town (2012) – effects of hospital-physician integration.
– Physician-hospital consolidation has not led to improved quality or reduced costs.
• Gaynor, Kleiner, and Vogt (2015) – hospital scale and scope economies.
– There are scale economies – seem to be exhausted around 330 beds
– No evidence of scope economies (cheaper to produce both secondary and tertiary care, or
different kinds of treatments, nervous system, eye).
– Nonprofits don’t have lower costs.
• Testimony of expert Kenneth Kizer in St. Luke’s case
– Employment of physicians hasn’t been show to be a superior organizational form.
– Organizational function is key, not a specific organizational form.
– Financial integration does not imply clinical integration.
– Clinical integration achieved with many different forms of organization.
• Less integrated: Fairview Health, Geisinger CABG, Sutter Health, Parc Nicollet, MSSP.
• More integrated: Presbyterian Health, Virginia Mason, Geisinger, Intermountain, Cleveland Clinic,
Kaiser.
– IDSs don’t necessarily produce integrated care.
• VA early 90s; Military health care.
• Capps et al (2010) – consolidation and charity care.
– No “Robin Hood” effect.
• Nonprofit hospitals with market power don’t spend more of their profits on charity care.
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7. Why Is There Concern About Consolidation?
• US uses a market system for providing care and for
financing ~50% of it.
• Therefore we need markets to work as well as they
possibly can.
• If mergers are between close competitors they can lead
to:
– Higher prices.
– Lower quality.
– Less dynamic, innovative marketplace.
• Hampers ability to reform effectively.
• Which also means:
– Lower wages.
– Lower benefits.
– Fewer jobs.
– More uninsured.
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8. Effects of Health Care Mergers
• Hospital mergers
– Can lead to substantial increases in price (20-65%).
• No differences between not-for-profits and for-profits.
• Who pays? Workers
– Can lead to substantially lower quality (Kessler and McClellan, 2000; Cooper et al., 2011;
Gaynor, Moreno-Serra and Propper, 2013).
• 1.46 percentage points higher mortality rate in most concentrated markets for Medicare heart
attack patients (Kessler and McClellan, 2000).
• Physician practice mergers
– Can lead to substantial price increases. (Dunn and Shapiro, 2014).
• Physician in market with 90th %-tile concentration charges fees 14-30% higher than physician in
market in 10th %-tile.
– Can lead to lower quality (Eisenberg, 2015).
• Higher mortality rates from Medicare angioplasty patients treated in more concentrated markets.
• Hospital acquisitions of physician practices.
– Higher spending or no change. (Robinson and Miller, 2014; Baker et al., 2014; Dranove et
al., 2015)
• Robinson and Mller: Practices owned by systems 19.8% higher spending than physician-owned;
local hospital owned 10.3% higher.
– Higher prices.
• Dranove et al.: 12% (PCPs) – 34% (Cardiologists).
• Effects of Narrow Networks (Gruber and McKnight, 2014).
– Lower spending, prices.
8

9. Specific Hospital Mergers
• Evanston Northwestern & Highland Park hospitals (Haas-Wilson and
Garmon, 2011).
– Four out of five insurers experienced substantial price increases due to the merger.
– 20.1%, 26.5%, 35.1%, 64.9% (relative to non-merging Chicago hospitals).
• Sutter & Summit hospital systems in SF Bay area (Tenn, 2011).
– Summit prices increase post-merger by 28.4%, 28.7%, 44/2% for 3 insurers.
• Cape Fear & New Hanover hospitals in Wilmington, NC (Thompson, 2011).
– Price increases of 56.5%, 65.3% for two insurers, no effect for one insurer, price
decrease of 30% for one insurer.
• Dominican Santa Cruz & AMI-Community hospitals in Santa Cruz, CA (Vita
and Sacher, 2001).
– Only two hospitals in Santa Cruz; 1 other hospital (Watsonville) in Santa Cruz county.
– Price increases of 23% at Dominican, 17% at Watsonville.
• Tenet & Ornda hospital corporations (Gaynor and Vogt, 2003).
– 2 Tenet hospitals in San Luis Obispo county (Sierra Vista, Twin Cities); one Ornda
hospital (French).
– 3 hospitals in SLO itself (French, General, Sierra Vista); five hospitals in San Luis
Obispo county, two more within 50 miles.
– Merger would have led to price increases of 53% at French, 32% at Sierra Vista, 33%
at Twin Cities, 5% at General, 5% Arroyo Grande.
• Inova Health System & Prince William hospital in Northern Virginia (Nevo,
Gowrisankaran, and Town, 2014).
– Price increase of 30.5% at Prince William.
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10. Conclusion: Competition Policy in
Health Care
• Antitrust enforcement key to vital markets.
– Static: prices, quality, service.
– Dynamic: keeping open opportunities for new, innovative forms to
enter and compete.
• Antitrust key part of health reform.
• Very hard to undo problematic arrangements.
• Many actors affect health care markets.
– Federal: CMS, HHS, FTC, DOJ, FDA, Congress,…
– State: legislatures, regulatory agencies.
• State antitrust immunity, negotiated settlements.
– Rules of the road/basic market conditions are key.
• CON, scope of practice, narrow networks, any willing provider, network
adequacy, transparency, market monitoring.
• Coordination/harmonization very important.
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11. END
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12. References
• Baker, L., Bundorf, K., and D. Kessler (2014) “Vertical Integration: Hospital Ownership of Physician Practices is
Associated with Higher Prices and Spending” Health Affairs 33(5): 756-63.
• Burns, L.R., Goldsmith, J.C., and A. Sen (2013) “Horizontal and Vertical Integration of Physicians: A Tale of Two
Tails,” Advances in Health Care Management, 15:39-117.
• Burns, L.R., McCullough, J.S., Wholey, D.R., Kruse, G., Kralovec, P. and R. Muller (2015) “Is the System Really the
Solution? Operating Costs in Hospital Systems” Medical Care Research and Review, 1-26.
• Capps, C., Carlton, D.W., and G. David (2010) “Antitrust Treatment of Nonprofits: Should Hospitals Receive Special
Care?” working paper, University of Pennsylvania, http://www.guy-
david.com/pdf/Capps%20Carlton%20David%20August%202010.pdf
• Capps, C., Dranove, D., and C. Ody (2015) “The Effect of Hospital Acquisitions of Physician Practices on Prices and
Spending,” Working Paper WP-15-02, Institute for Policy Research, Northwestern University.
• Cooper, Z., Gibbons, S., Jones, S. and A. McGuire (2011) “Does Hospital Competition Save Lives? Evidence from the
English NHS Patient Choice Reforms.” Economic Journal 121 (554): F228–260.
• Dafny, L. (2009) “Estimation and Identification of Merger Effects: An Application to Hospital Mergers,” Journal of
Law and Economics, 52:523-550.
• Dunn, A. and A.H. Shapiro (2014) "Do Physicians Possess Market Power?," Journal of Law and Economics, 57(1):
159-193.
• Eisenberg, M. (2015) “Competition and Quality in Physician Services Markets,” unpublished paper, Carnegie Mellon
University.
• Gaynor, M., Kleiner, S. and W.B. Vogt (2015) “Analysis of Hospital Production: An Output Index Approach,” Journal
of Applied Econometrics, 30(3): 398-421.
• Gaynor, M. and R.J. Town (2012) “The Impact of Hospital Consolidation – Update,” June, The Synthesis Project,
Policy Brief No. 9, Robert Wood Johnson Foundation.
• Gaynor, M., Moreno-Serra, R. and C. Propper (2013) “Death by Market Power:
Reform, Competition, and Patient Outcomes in the National Health Service,” American Economic Journal:
Economic Policy, 5(4): 134–166.
• Gowrisankaran, G., Nevo, A. and R.J. Town (2015) "Mergers When Prices Are Negotiated: Evidence from the
Hospital Industry." American Economic Review, 105(1): 172-203.
• Haas-Wilson, D. and C. Garmon (2011) “Hospital Mergers and Competitive Effects: Two Retrospective Analyses,”
International Journal of the Economics of Business, 18(1): 17-32.
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13. References, 2
• Hwang, W. ,Chang, J., LaClair, M., and H. Paz (2013) “Effects of Integrated Delivery System on Cost and
Quality,” American Journal of Managed Care, 19(5): e175-e184.
• Kessler, D.P. and M.B. McClellan (2000) “Is Hospital Competition Socially Wasteful?” Quar-
• terly Journal of Economics, 115 (2): 577–615.
• Kizer, Kenneth (2013) “Analysis of Quality-Related Efficiencies: St. Luke’s Acquisition of Saltzer Medical
Group,” Demonstrative for Testimony of Kenneth W. Kizer, M.D., M.P.H.
https://www.ftc.gov/system/files/documents/cases/131021stlukedemokizer.pdf
• Koch, T.G., Wendling, B.W. and N.E. Wilson (2015) “How Vertical Integration Affects the Quantity and Cost of
Care for Medicare Beneficiaries,” unpublished paper, Bureau of Economics, Federal Trade Commission.
• McWilliams, J.M., Chernew, M.E., Zaslavsky, A.M., Hamed, P. and B.E. Landon (2013) JAMA Internal Medicine,
August 12, 173(15): 1447-1456.
• Pennsylvania Health Care Cost Containment Council (2004) “Pennsylvania’s Guide to Coronary Artery Bypass
Graft Surgery 2004”
• http://www.phc4.org/reports/cabg/04/docs/cabg2004report.pdf.
• Robinson, J.C. and K. Miller (2014) “Total Expenditures per Patient in Hospital-Owned
and Physician-Owned Physician Organizations in California,” JAMA, 312(16): 1663-1669.
• Tenn, S. (2011) “The Price Effects of Hospital Mergers: A Case Study of the Sutter-Summit Transaction,”
International Journal of the Economics of Business, 18(1): 65-82.
• Thompson, A. (2011) “The Effect of Hospital Mergers on Inpatient Prices: A Case Study of the New Hanover-
Cape Fear Transaction,” International Journal of the Economics of Business, 18(1): 91-101.
• Tsai, T.C. and A.K. Jha (2014) “Hospital Consolidation, Competition, and Quality: Is Bigger Necessarily
Better?” JAMA, July 2, 312(1): 29-30.
• Vita, M. G. and Sacher, S. (2001), The Competitive Effects of Not-for-Profit Hospital Mergers: A Case Study.
The Journal of Industrial Economics, 49: 63–84.
• Vogt, W.B. and R.J. Town (2006) “How Has Consolidation Affected the Price and Quality of Hospital Care?”
Research Synthesis Report No. 9, February, Robert Wood Johnson Foundation.
• Weeks, W.B., Gottlieb, D.J., Nyweide, D.J., Sutherland, J.M., Bynum, J., Casalino, L.P., Gillies, R.R., Shortell,
S.M., and E.S. Fisher (2010) “Higher Health Care Quality and Bigger Savings Found at Large Multispecialty
Medical Groups,” Health Affairs, 29(5): 991-997.
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14. State Actions
• States can take actions to promote or retard health care
competition.
– Regulations
• Narrow/limited networks.
– Legislation.
– Network adequacy review.
• Monitoring health care markets, prices, quality (MA HPC, All-Payer
databases).
• Transparency (prices, quality).
• Barriers to entry/competition: CON, Scope of practice.
• ACO review – TX.
• Antitrust immunity for cooperative agreements (could include
ACOs). [MT, NC, NY, TX]
– Federal guidelines provide safe harbors or rule of reason treatment.
– Major challenges with monitoring exempted organizations.
– Antitrust enforcement
• Structural vs. Conduct remedies
– E.g., MA Attorney General and Partners
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