Hospital mergers, by year: 2005: 50 deals 2009: 50 deals 2014: 102 deals Source: Irving Levin Associates
— Dan Diamond (@ddiamond) April 7, 2015
In my region, big hospital chains have gotten bigger. National chains have moved into the area. Little hospital groups have grown up to be middle sized hospital groups. Loose shared purchasing alliances have transformed into rural hospital conglomerates.
Some mergers every year are to be expected. There are the “rescue” mergers where a failing hospital is taken over by a larger partner, there are regional consolidation of expertise mergers where a region that used to be able to support three trauma centers now only have the demand for two trauma centers due to natural population loss. And then there are the rent extraction mergers where the entire goal is to increase the market power of a provider so that they can get higher reimbursement rates. The executives will also say that they can bring syngergies and eliminate back-end duplication which will lower costs but the evidence supports that most mergers don’t change the cost structure of a regional market except to increase average prices paid.
Obamacare is contributing to this trend as it is placing two major requirements on large providers. The first driver is the push towards electronic medical records (EMR). EMR’s are very useful but expensive. They also are extremely susceptible to being almost scale invariant in the amount of high cost back-end support needed. An EMR that is used by one hospital with eighty beds is only slightly cheaper to run than an EMR that is used by four hospitals with five hundred beds. The install costs are scaled nearly linearly, but the running costs barely budge.
The other, and I think the bigger driver, is the transfer of population risk management from the nearly exclusive domain of insurers and local governments to now including providers through the proliferation of accountable care organizations and quality related payment schemes. ACOs require large up-front infrastructure investments to get started, and again those investments don’t scale linearly. The marginal cost of adding one additional office to a current ACO is far less than the cost of starting a new ACO for a new office. Furthermore, statistical tyranny comes into play. Population health management is far less risky as the populatin gets larger. Large populations under care management means all the random things that can happen get balanced out at a higher rate. There is less variance which means there is less risk.
This is a problem because concentrating provider markets while at the same deconcentrating payor markets means pricing power shifts even more to providers. We already pay the most per unit of care in the OECD, and this shift nudges us further out on the cost curve. Perhaps the move to narrower networks is enough to counteract this nudge, perhaps the move to ACOs and shared risk payment models brings the cost curve down sufficiently so that on net, we’re still in good shape, perhaps the re-engineering of hospitals as a source of wellness instead of sick care is dropping utilization to mask the increased pricing pressure. Perhaps…. but this is still a problem that has been excacerbtaed by PPACA.