(Illustration by Melinda Arendt)

Rx for Merger Madness

Hospitals and physician practices are consolidating; for businesses covering their workers, that means re-evaluating current plans to keep health care costs from soaring

Back Longreads Sep 5, 2019 By Steven Yoder

In the 2019 American economy, the big are getting bigger. Mergers are everywhere — the number of mergers and acquisitions exceeded 15,000 in 2017, a record for a single year, with 2018 a close second.

That makes the consolidation in California’s health care sector no anomaly. A September 2018 study  in the journal Health Affairs by UC Berkeley and Rand Corporation researchers calculated that in 41 California counties, hospital market concentrations were almost three times higher than the level the federal government already considers “highly concentrated.” The latest key marriage was in January between Catholic Health Initiatives, which has national offices in six states, and Dignity Health, based in San Francisco. Together, the two systems comprise a 150,000-employee company serving 21 states with 30 hospitals in California that’s now known as CommonSpirit Health. (Across the 21 states, CommonSpirit has 142 hospitals and more than 700 care sites, according to several reports.)

For consumers, economies of scale don’t necessarily mean lower prices. About a year ago, Tom Avery needed an MRI of his shoulder for a torn rotator cuff. As president and founder of employee-benefits consulting firm Innovative Broker Services in Folsom, it was a chance to research differences in list prices among providers, so he called five. The gaps weren’t small. The Sutter Health imaging center to which his doctor had referred him came in highest at $3,200. An independent MRI facility down the street — where he ended up going — charged $700, he says. Sutter’s list price for that MRI has since increased to $3,720, according to data on its website. (A Sutter spokesperson declined to respond to a question about the price difference.) 

Sutter runs the second-largest health system in the state, with Kaiser Permanente and the pre-merger Dignity coming in either first or third, depending on how the count was done. Rankings in 2017 by medical industry data provider IQVIA, which rates system size by number of facilities owned and managed, found Kaiser as the largest California-based integrated health system, with Sutter second and Dignity third. A 2016 study used another measure, the number of system-owned hospitals in the state, ranking Dignity first and Sutter second. 

That study found that hospital prices at Sutter and Dignity were 25 percent higher than at other hospitals around California. The researchers used data from Blue Shield of California, so Kaiser was not included because it operates both a health system and an insurer.

Evidence suggests that mergers are creating giant health care systems that can wield their market power to drive up prices. An ongoing lawsuit by California’s attorney general against Sutter alleges exactly that, charges Sutter rejects. For businesses buying health care for their employees, such consolidation means it’s tougher than ever to control health costs. That’s why benefits experts say it’s critical for companies to regularly evaluate alternatives that can help them gain a price advantage.

A Collapsing Food Chain

In California health care, it’s not just the big fish — the hospitals  — eating each other in mergers. The big fish also are swallowing big schools of minnows. The UC Berkeley researchers found that the share of physician practices owned by hospitals increased from about 25 percent in 2010 to more than 40 percent in 2016. Among specialist doctor practices, the increase was bigger, up from 20 percent in 2010 to 54 percent in 2016.  

The researchers’ data showed all that market power pushed up the prices of physician outpatient services by 5-9 percent and Affordable Care Act insurance premiums by 12 percent. That’s how economic theory would predict having just a few big suppliers in a market — oligopoly power — works. “If the providers have greater control of the process, the discounts — from what I can tell — tend to be less, and it just drives insurance costs right up,” says Steve Vilas, chief financial officer and partner at benefits-consulting firm Burnham’s Roseville office.

Locally, a few counties are off the charts in health care provider concentration. The UC Berkeley researchers rated each county’s concentration of market power on a scale from 1 to 6 and used their data to identify seven “hot spots” where a few providers have vacuumed up almost all competitors. Their data showed market concentration didn’t increase in Sacramento County from 2010 to 2016, with the county rating a moderately high 4 out of 6 both years. But it did for most of the surrounding counties, especially to the east. Amador and Calaveras counties both show up as hot spots, with the highest rating of 6. El Dorado County came in at 5, making it among the 10 most concentrated markets in the state. 

Will Challenges Change the Picture?

Politicians are pushing back against the threat of consolidation and rising prices. State legislators have introduced at least two bills since 2016 designed to provide more oversight of health care mergers and forbid anticompetitive practices, though neither passed. 

And an important lawsuit is testing the power of government to regulate large providers’ negotiating practices. In March 2018, the state attorney general filed an antitrust lawsuit against Sutter, joining an earlier antitrust class action complaint brought by employers and labor unions. They allege the health system engages in anticompetitive practices that have pushed up costs. Those allegedly include all-or-nothing contracts that force insurers that it contracts with to accept all of Sutter’s sites regardless of considerations like location or price. They charge that Sutter includes gag clauses through which it forbids insurers from sharing price information with customers or competitors. And its contract terms forbid insurers from giving their patients financial incentives to use lower-cost, non-Sutter providers, the plaintiffs say. The case was scheduled to go to trial in September. 

“When like-sized systems come together in health care, they don’t get rid of anybody. And it’s because that merger isn’t for efficiency. It’s for negotiating power.” Chad Follmer, senior vice president, Woodruff Sawyer

 A Sutter spokesperson declined to respond to questions Comstock’s sent by email about the allegations. Sutter spokesperson Amy Thoma Tan instead released a statement that read, in part, “Sutter Health is vigorously defending itself against what we believe are baseless allegations brought by self-interested plaintiffs whose lawsuit is supported by insurance companies. It is insurance companies who will benefit from the remedies sought through this litigation, not Northern California patients. … The Affordable Care Act explicitly encourages integrated models of care like Sutter Health to foster better quality and value in healthcare. … Yet the plaintiffs suing us want to dismantle Sutter’s integrated network.” 

That response gets at an important question experts have debated, including at an October Health Affairs forum in Sacramento: Is it possible to have an integrated health system, which most everyone agrees is a good idea, without financial consolidation? The 2010 ACA did create financial incentives for health care providers to integrate by forming accountable care organizations, or ACOs — groups of providers that agree to closely coordinate their care to avoid unnecessary procedures.

If there’s an uber-ACO out there, it’s Kaiser, made up of a health insurance plan, physician groups, a hospital system and now even a medical school. A 2015 report by the Brookings Institution pointed to Kaiser’s integration leading to better outcomes and lower costs. Kaiser providers all use the same electronic medical records system, doctors work in teams with other providers like psychologists and social workers, and providers operate under the same goal of keeping people healthy and out of the hospital rather than generating lots of billable services, the report says. 

Providers have responded to the federal push for ACOs and the competitive pressure of Kaiser’s model. Sutter launched its own HMO in 2013, Sutter Health Plus — an integrated network of hospitals, doctors and other health care services. Other systems in the region — like UC San Francisco, Stanford Health Care, Canopy Health and now CommonSpirit Health — are following suit, says Dard Hunter, a senior vice president at Lockton, a benefits broker and consultancy that has an office in Sacramento. It’s an acknowledgment, he says, that “Kaiser has won the battle of the model.”

If integrated systems can deliver on better patient experience, better health outcomes and lower cost, then everyone wins, says Hunter. But Chad Follmer, a senior vice president at the Sacramento office of Woodruff Sawyer, an insurance brokerage and consulting company, is skeptical about that last part — lower cost. He points out that sometimes a merger can save a struggling rural hospital, which benefits everyone who lives there. But overall, “When like-sized systems come together in health care, they don’t get rid of anybody,” he says. “And it’s because that merger isn’t for efficiency. It’s for negotiating power.”

How Businesses Can Take Back (Some) Control

Businesses shouldn’t count on the ongoing legal and legislative battles to keep their health care costs reasonable — they need to search out alternatives, say benefits experts.

For large companies with about 500 employees or more, the most common solution is self-insurance — cutting out health insurance companies and paying providers directly. Plans like that covered about 5.7 million California workers at last count. Under the self-funding approach, experts point to one promising strategy: reference-based pricing. Instead of accepting a health care provider’s list prices as the starting point, employers set the price they pay — say, 175 percent of the Medicare fee — and then negotiate from that starting point as needed. For large companies that can’t enroll in an HMO because they have many employees outside the region, that may be the most promising option; companies that use it save 5-15 percent on costs, according to a March 2018 Lockton report.

But for smaller companies and for big companies that have all or most of their employees here, one of the narrow-network HMOs that dominate the Sacramento market nearly always comes out cheaper, says Chris Bender, vice president of benefits at Bender Insurance Solutions in Roseville. HMOs offer better prices than all but the most aggressive reference-based plans, those that start very low, at levels like 125 or 150 percent of Medicare, says Bender. But those aggressive plans can cause problems of their own, ending in hard negotiations with health care providers and unhappy employees who are more likely to get surprise bills from their doctors.

Benefits experts say any plan needs to be tailored to a firm’s size and employee demographics. But the price pressures mean it’s more important than ever for firms to regularly reassess how they’re paying for coverage to spot ways to save. Avery, of Innovative Broker Services, for example, is working with a 5,000-employee client trying to save money on pharmacy benefits. In researching the company’s current plan, he discovered drug companies are paying the firm’s pharmacy benefits manager — a company that acts something like a pharmaceuticals distributor for self-insuring employers and insurers — more than $500,000 in rebates, which the manager hasn’t passed along to Avery’s client. If the client heeds Avery’s advice, that practice is about to end.

A few recent developments could indicate that a Godzilla vs. King Kong moment is approaching — when the pricing power of giant health care systems meets the purchasing power of giant buyers. In March, Amazon, J.P. Morgan Chase and Berkshire Hathaway announced the formation of a new company to contract directly with hospitals and clinics that provide high-quality care at lower cost. Since the three companies have 1.2 million combined employees, the announcement shook the health care world — health care stocks shed billions of dollars when word of the venture came out in January, according to reports.

Follmer is skeptical that will do much to cut costs, given how little success already-huge health insurers like Aetna and UnitedHealthcare have had in checking cost growth. He has more faith in big employers banding together to do something different: start or acquire their own provider networks, in much the way that one iconic industrialist launched his own health system to serve shipyard workers during World War II. “What would be really innovative is a new Kaiser,” he says. 

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