Provider Consolidation

Provider consolidation has flown under the radar compared to national health plan and pharmacy benefit mergers, but they're having a large impact on health care costs and network contracting in many markets. Employers can take steps to mitigate cost increases and increase value for their employees.

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Provider consolidation has flown under the radar, as compared to mergers of national health plans and pharmacy benefits managers (PBMs.) But as health systems grow larger in many local markets, they’re able to extract burdensome concessions from health plans that impact large employers. Dominant provider groups often demand the following, because they know most health plans and employers are unwilling to carve them out of their networks:

  • Higher price increases after mergers and major acquisitions, including added facility fees for services previously delivered in independent physician offices.
  • Refusal to be listed in price transparency tools, effectively eliminating any real ability for a plan member to choose a cost-effective site of service.
  • Requirements that all hospitals and provider groups owned by the health system are included in the network, regardless of their individual performance on quality and outcomes.

For any employer that decides to carve out newly consolidated health systems to avoid price increases, there is significant risk for member disruption and pushback. This Wall Street Journal investigative report documents many of these challenges.

What is Provider Consolidation?

Vertical consolidation: A hospital system purchasing primary care offices, oncology practices, imaging centers, and other non-hospital providers to incorporate them into a broader network. Newly incorporated providers often charge higher rates, add facility charges, and can be used to funnel patients into the system’s hospitals.

Horizontal consolidation: A traditional merger between hospital systems or other providers of the same type. The rate of hospital merger deals nearly doubled from the period 2002- 2007, to the period 2011-2015.

Employers Skeptical of the Benefits of Consolidation

According to the 2019 Large Employers’ Health Care Strategy and Plan Design Survey, large employers generally report skepticism that provider consolidation will lead to cost control, or improvements in quality of care or consumer experience. These impressions largely align with broader research on the cost and quality impact of provider consolidation, which suggests that consolidation often results in price increases in the short term, while integration and performance improvement takes much longer to achieve, if it’s achieved at all. While there is some employer optimism that provider consolidation will lead to data integration and value-based care model successes, employers should take care to assess provider data capabilities when considering value purchasing arrangements.

Health Care Utilization is Steady, but Prices Continue to Rise

Employers report that overall medical price inflation is their fourth highest cost driver, which is significantly impacted by provider consolidation. This aligns with recent data that shows medical care costs continuing to rise, even as utilization holds steady or decreases. Unit prices are up, while utilization has fallen.

Why is Provider Consolidation Increasing?

There are many proposed explanations for the increase in horizontal and vertical consolidation in health care.

  • Merging hospital systems argue that they’re better able to improve population health at scale, which is necessary to succeed in accountable care organization (ACO) contracts.
  • Independent practices see private insurance rates getting squeezed, increasing their incentive to join a large system.
  • Physicians practicing in a hospital system have less autonomy, but more stability, regular hours, and fewer responsibilities for office administration and insurance negotiations.
  • Per capita utilization rates are decreasing, so health systems are looking for ways to make up revenue through higher prices.
  • In smaller and rural markets, provider market power can increase quickly if even just one hospital or large physician group goes out of business or merges.

Imagine You’re a Hospital Administrator

A competing hospital in your market purchases a physician group and changes referral patterns such that the newly acquired physicians will now steer patients to the competing hospital for high-revenue specialty care. You start to see your inpatient volume decrease. Another hospital in your market is purchased by a health system with a great reputation from a neighboring market, which rebrands the newly acquired hospital and begins a prominent advertising campaign to attract patients. What do you do?

Many hospital administrators find themselves in this position and are looking for opportunities to expand their own market share to keep up with competitors. Just as PBMs and health plans are merging to expand market share, providers are doing the same, many of which are facing decreasing operating margins already. This provider competition has a significant impact on employers’ and health plans’ ability to negotiate unit price, create high-performance networks, and achieve other contracting goals, like quality and price transparency.

What Employers Can Do

  • Partner with health plans and consultants to continually assess and strengthen local options in markets where you have a significant population of employees. Adding an employer’s voice to health plan-provider negotiations can ease contracting barriers; connect with your partners to strategize on how to best support joint efforts.
  • Seek opportunities for collaboration with other local employers to increase your influence; the Business Group regularly conducts local market benchmarking calls; contact us to get involved.
  • Some employers with sufficient knowledge and bandwidth are exploring direct contracts with ACOs and high-performance networks in select markets, and deploying site-of-care steerage strategies to encourage the use of high-performing providers.
  • Encourage your leadership to meet directly with health system leaders in heavily consolidated markets. Some employers have achieved concessions in pricing and contractual provisions when health systems better understand the impact that their actions have on self-insured employers – and their employees.
  • If the decision is made to carve out major health systems due to contracting and/or pricing challenges, use a robust communication strategy to help plan members understand why this is happening, and provide transition-of-care plans and concierge/care management assistance for those who are affected.

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TABLE OF CONTENTS

  1. What is Provider Consolidation?
  2. Employers Skeptical of the Benefits of Consolidation
  3. Health Care Utilization is Steady, but Prices Continue to Rise
  4. Why is Provider Consolidation Increasing?
  5. Imagine You’re a Hospital Administrator
  6. What Employers Can Do