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POLICY BRIEF
NO. 9 REVISED | JUNE 2012
Also see companion report available at www.policysynthesis.org
THE SYNTHESIS PROJECT
NEW INSIGHTS FROM RESEARCH RESULTS
The impact
of hospital
consolidation
—Update
SUMMARY OF KEY FINDINGS
> Hospital consolidation gener-
ally results in higher prices.
This is true across geographic
markets and different data
sources. When hospitals merge in
already concentrated markets, the
price increase can be dramatic,
often exceeding 20 percent.
> Hospital competition improves
quality of care. This is true under
both administered price systems,
such as Medicare and the English
National Health Service, and
market determined pricing such
as the private health insurance
market. The evidence is more
mixed from studies of market
determined systems, however.
> Physician-hospital consoli-
dation has not led to either
improved quality or reduced
costs. Studies find that consoli-
dation was primarily for the
purpose of enhanced bargaining
power with payers, and hence
did not lead to true integration.
Consolidation without integration
does not lead to enhanced
performance.
Introduction
In 2006, the Synthesis Project published a research synthesis on the impact of hospital
mergers on prices, costs and quality of care (38). Since that time, the literature has
expanded a great deal. We review those subsequent findings in this Synthesis Update.
In particular, we focus on the impact of hospital mergers on prices and quality, and
introduce a review of the evidence on physician-hospital consolidation (absent from
the 2006 synthesis). The Patient Protection and Affordable Care Act (ACA) promotes
Accountable Care Organizations (ACOs) and the bundling of payments across
providers for an episode of care (“bundled payments”). Both of these features of the
ACA encourage consolidation between hospitals and physician practices, which in fact
has recently accelerated.
What is the relationship between hospital consolidation
and prices?
Increases in hospital market concentration lead to increases in the price
of hospital care.1 This finding is consistent with the conclusion of the 2006 synthesis.
Since the 2006 report, several econometric studies have revisited the relationship
between price and hospital concentration, using data from a variety of sources, thereby
expanding the geographic scope of the evidence base. The prior evidence came almost
exclusively from California. The more recent evidence comes from more states (Florida,
Massachusetts) and from the entire United States (see Table 1). Ultimately, increases
in health care costs (which are generally paid directly by insurers or self-insured
employers) are passed on to health care consumers in the form of higher premiums,
lower benefits and lower wages (see, e.g., Baicker and Chandra (4)).
By Martin Gaynor, PhD1 and
Robert Town, PhD2
1 Heinz College, Carnegie Mellon
University
2 The Wharton School, University
of Pennsylvania
1 Hospital concentration measures the extent to which a market is dominated by a few (or one) hospitals. All else
equal, the higher the market concentration, the less vigorous is the resulting price competition. Consolidation within a
market (e.g., via mergers) reduces independent market participants and by doing so increases market concentration.
Table 1: Summary of hospital concentration studies since 2006
Author/
Year
Location
of data
Time frame
of analysis
Results
Akosa Antwi
et al. (2009)
CA 1999–2005 Prices increased twofold over period and growth
is highest in monopoly markets; however, changes
in market concentration are not associated with
differential price growth.
Dranove et al.
(2008)
CA
& FL
1990–2003 The association between hospital concentration and
price increased during the 1990s and leveled off
during the 2000s.
Melnick
and Keeler
(2007)
CA 1999–2003 Hospital concentration is positively associated with
price growth; hospitals in large systems experienced
higher price growth.
Moriya et al.
(2010)
US 2001–2003 Insurer concentration is negatively associated
with hospital prices; hospital price/concentration
relationship is insignificant.
Wu (2008) MA 1990–2002 Hospitals for which a rival hospital closed experienced
a price increase relative to controls.
UPDATE
June 2012
This document is an update of a
previous Synthesis Report available
at www.policysynthesis.org
ISSN 2155-3718
2 | THE SYNTHESIS PROJECT, POLICY BRIEF NO. 9 | THE ROBERT WOOD JOHNSON FOUNDATION | The impact of hospital consolidation—Update
Prices paid to hospitals by private health insurers within hospital markets vary
dramatically (22). The evidence points to differences in hospital bargaining leverage
as a principal driver of the difference between relatively expensive and inexpensive
hospital systems within the same hospital market.
Some evidence suggests that growth in prices is related to market
concentration. An important policy question is whether, in addition to leading
to a one-time price increase, hospital mergers increase the rate of growth of hospital
prices. A few studies have addressed this issue (see Table 1), with the most recent
studies giving somewhat conflicting answers to this question. Melnick and Keeler find
a positive correlation between price growth and market concentration (28). On the
other hand, Akosa Antwi et al. find that monopoly markets experienced the highest
rates of growth, but there was little relationship between changes in concentration and
the growth of prices (2).
Hospital mergers in concentrated markets generally lead to
significant price increases. Several studies have taken a retrospective look at
the impact of recent hospital mergers on prices paid to hospitals by health insurers.
This research focuses on a “case study” merger and examines the change in inpatient
prices after the merger compared with a set of “control” hospitals (see Table 2).
The magnitude of price increases when hospitals merge in concentrated markets is
typically quite large, most exceeding 20 percent. Analyses that use data spanning large
geographic regions that encompass many hospital mergers also find that, for the most
part, hospital mergers in concentrated markets result in significant price increases.
Price increases exceeded 20% when mergers
occurred in concentrated markets.
ANTITRUST ENFORCEMENT
In recent years, the Federal Trade
Commission (FTC) has become more
aggressive in challenging cases and
has had dramatically more success
than during the 1980s and 1990s.
At the time of the 2006 synthesis,
after a decade and a half long
series of unsuccessful attempts to
block hospital mergers, the Federal
Trade Commission (FTC) had just
successfully litigated its first hospital
merger case. In this case, the FTC
challenged a consummated merger
and the court found that the merger
between Evanston-Northwestern
Hospital and Highland Park Hospital
(both located in Evanston, Ill.) led to
an increase in prices. The decision
in this case is important because it
established that proximate not-for-
profit hospitals in urban areas can
increase market power by merging.
Importantly, the case also established
that, post-acquisition, hospitals are
willing to use their increased market
power to raise prices.
The findings in the Evanston-
Northwestern case gave the FTC a
firm footing for litigation of hospital
merger cases. Since 2006, the FTC
has successfully brought suit to stop
several hospital mergers. Of particular
note is the ProMedica case, in which
a federal judge granted the FTC an
injunction in its antitrust challenge of
ProMedica’s acquisition of a hospital.2
It is the first prospective merger court
victory for the enforcement agencies
in decades.3
2 United States of America Federal Trade
Commission Office of Administrative Law
Judges, Docket No. 9346, In the Matter of
ProMedica Health System, Inc., December
12, 2011 (http://www.ftc.gov/os/adjpro/
d9346/120105promedicadecision.pdf).
3 Prospective merger analysis seeks to assess
the competitive harm from a transaction
principally based on information available prior
to the consummation of the transaction.
Author/
Year
Location
of mergers
Time frame
of analysis Results
Dafny (2009) US 1999–2005 Merging hospitals had 40%
higher prices than non-
merging hospitals.
Haas-Wilson and
Garmon (2011)
Evanston, IL Mergers
of Evanston-NW &
Highland Park and
St. Therese & Victory
Memorial
1990–2003 Post-merger, Evanston-
NW hospital had 20%
higher prices than control
group; no price effect at St.
Therese–Victory.
Tenn (2011) SF Bay Area, CA
Sutter/Summit merger
1999–2003 Summit prices increased
28.4% to 44.2% compared
with control group.
Thompson (2011) Wilmington, NC
New Hanover-Cape
Fear merger
2001–2003 3 of 4 insurers experienced
a large price increase;
1 insurer experienced a
decrease in prices.
Town et al. (2006) US 1990–2002 Aggregate hospital merger
activity increased the
uninsured rate by
.3 percentage points.
Table 2: Summary of hospital merger event studies since 2006
The impact of hospital consolidation—Update | THE ROBERT WOOD JOHNSON FOUNDATION | THE SYNTHESIS PROJECT, POLICY BRIEF NO. 9 | 3
Hospital competition improves quality.
PHYSICIAN-HOSPITAL
CONSOLIDATION
It is important to distinguish between
consolidation and integration.
Consolidation is simply bringing
together two (or more) previously
independent entities. Integration
implies more—in particular,
elimination of unnecessary
duplication, creating systems to
bring the previously separate entities
together, and comprehensive
management of the organization as
a whole.
Limited data show that
consolidation between
physicians and hospitals is
increasing. Increasing numbers of
physicians are working as hospital
employees and increasing numbers
of physician practices are owned by
hospitals. The number of physicians
working as employees grew from
around 31 percent in 1996–97 to
36 percent in 2004–05 (26). Another
survey found that the percentage of
primary care physicians employed by
hospitals rose from under 20 percent
in 2000 to over 30 percent in 2008
and the percentage of specialists
employed by hospitals rose from
just over 5 percent to 15 percent
(25). The percentage of physician
practices owned by hospitals rose
from around 20 percent in 2002
to over 50 percent by 2008 (25).
On the other hand, the percentage
of hospitals with other kinds of
physician-hospital relationships, such
as physician hospital organizations
(PHOs) and independent practice
associations (IPAs), has fallen
steadily from 2000 through 2010 (3).
What is the relationship between hospital consolidation
and quality?
At least for some procedures, hospital concentration reduces
quality. Since the 2006 synthesis report, many new econometric studies have
examined the impact of hospital competition on quality of care, using data from
a variety of sources, including studies from outside the United States. The new
econometric studies can be divided into two types: those that examine markets with
administered prices and those that examine markets with market determined prices.
Hospital competition improves quality under an administered pricing
system. Studies of the impact of competition on hospital quality under an
administered price regime are based on the U.S. Medicare program and the English
National Health Service (NHS), which made a transition to administered prices in
a 2006 reform. The evidence presented in the 2006 synthesis was entirely from the
Medicare program. The findings from those studies were mixed, but the strongest
evidence was that tougher competition led to enhanced quality of care. Those results
are reinforced by newer studies from the NHS, which uniformly show a positive
impact of competition on the quality of care. The 2006 reform in the NHS was
intended to create competition among hospitals for patients, by allowing patients
to choose their hospital, while setting regulated prices in a manner very similar to
the Medicare DRG-based system.4 The studies all show a substantial impact of the
introduction of hospital competition in the NHS on reducing mortality rates (see
Table 3). While it is not possible to draw direct conclusions about the United States
based on evidence from the United Kingdom, these studies add to the growing
evidence base that competition leads to enhanced quality under administered prices.
Table 3: Summary of hospital quality-competition studies with administered prices
since 2006 (continued on next page)
Author/
Year
Location
of data
Time
frame of
analysis
Does
competition
increase
quality? Results
Cooper
et al.
(2011)
England 2002–08 Yes Acute myocardial infarction (AMI) mortality
fell significantly faster after the reforms in less
concentrated markets. This led to 300 fewer
AMI deaths per year.
Gaynor
et al.
(2010)
England 2003–04,
2007–08
Yes All-cause and AMI mortality fell significantly
faster after the reforms in less concentrated
markets. There were no effects on length of
stay, expenditures or productivity. This led
to 4,791 life years saved from deaths from
all-causes averted, and 1,527 AMI life years
saved. Benefits outweigh costs.
Bloom
et al.
(2010)
England 2006 Yes Hospitals in less concentrated markets have
better management, and better management
leads to reduced mortality. Adding an
additional hospital close by improves
management quality and thereby reduces
heart attack mortality by 10.7%.
4 The NHS reforms introduced: patient choice among hospitals, regulated prices, and performance incentives for
hospital managers. Previously a local public entity selectively contracted with hospitals (often sole source) to
provide care for their patients. Contract negotiations focused on price, not quality. Patients had little choice and
hospital managers had little incentive to compete for patients on quality. See Cooper et al. (13), Gaynor et al.
(20) for more details.
4 | THE SYNTHESIS PROJECT, POLICY BRIEF NO. 9 | THE ROBERT WOOD JOHNSON FOUNDATION | The impact of hospital consolidation—Update
Physician-hospital consolidation studied so far
did not involve true integration.
Table 3: Summary of hospital quality-competition studies with administered prices
since 2006 (continued from previous page)
Author/
Year
Location
of data
Time
frame of
analysis
Does
competition
increase
quality? Results
Beckert
et al.
(2012)
England 2008–09 Yes Hip replacement patients are significantly
more likely to choose higher-quality
hospitals. A 5% increase in a hospital’s
mortality rate decreases demand by 6.9%.
Hospital mergers substantially reduce the
responsiveness of demand to mortality.
Gaynor
et al.
(2011)
England 2003–04,
2007–08
Yes Coronary artery bypass graft surgery (CABG)
patients’ responsiveness to hospital mortality
rates is substantially higher after the reforms.
A 1% increase in a hospital’s mortality rate
reduces its market share by over 4% after the
reforms. The change in elasticity due to the
reform led to a significant reduction in mortality.
Competition improves quality where prices are market determined,
although the evidence is mixed (Table 4). There have also been substantial
additions to this literature since the 2006 synthesis. The findings from these studies
are more mixed than the findings of recent studies of markets with administered
prices. This stands to reason: if hospitals can compete on both price and quality, then
when they face tougher competition they will choose to compete by whichever means
is most effective. If buyers are considerably more responsive to price than quality (for
example, if price is easier to measure), then enhanced competition can lead to lower
prices, but also less attention to quality. On the other hand, if quality is particularly
salient, then tougher competition can enhance quality.
All of the U.S. studies except for one find that competition improves quality, while
the English studies uniformly find negative effects.5 The difference appears to most
likely be due to differences in the possibility of patient choice between the United
States and England (in the 1990s).
In the United States, prices are negotiated by price-sensitive insurers. These insurers
have strong incentives to obtain lower prices, since their customers, typically employers,
are responsive to price differences. Insurers, however, do not engage in sole-source
contracting. They contract with sets, or “networks,” of hospitals. Patients are thus free to
exercise choice of hospital within a network (which is often quite broad). Hospitals have
an incentive to compete on quality in order to attract patients within a network. As a
consequence, there are both price and quality incentives in play.
In contrast, in England in the 1990s, negotiation was done by a single local public entity
(Primary Care Trust, or PCT) for all individuals in a geographic area, and contracts were
sole source. Purchasers could use savings obtained via lower prices to purchase more
care (particularly elective care). Hospitals’ operating incomes came from contracts with
purchasers. Information on quality was not publicly available. This led to negotiations
focused on price, not quality. As a consequence, patients had little or no choice of hospital,
and there was far less incentive for hospitals to compete on quality to attract patients.
PHYSICIAN-HOSPITAL
CONSOLIDATION, CONT.
Consolidation between physicians
and hospitals is of great interest both
because of the potential consolidation
has for creating integration, and the
impetus created by the ACA’s push
towards creating Accountable Care
Organizations (ACOs) and emphasis
on bundled payments. In theory, there
are substantial gains to be made from
consolidation. However, there are
also concerns that consolidation may
have adverse impacts on competition.
Consolidation can simply be an
attempt by providers to enhance
bargaining power vis à vis insurers.
The research evidence on
physician-hospital consolidation
does not find evidence supporting
either clinical gains or cost
reductions (9, 27). The most likely
reason is that most consolidation did
not lead to true integration. Evidence
on this topic comes from examination
of physician-hospital organizations in
the 1990s. Current consolidation is
too recent to allow for studies of its
effects. While the successes of certain
prominent integrated organizations,
such as Geisinger Health System,
InterMountain Healthcare, or the Mayo
Clinic, are frequently mentioned as
support for gains from consolidation,
these are ad hoc examples, selected
for their positive results. They do not
constitute research evidence.
5 The English studies are of a prior reform in the 1990s which emphasized price competition (see Propper et al.
(31) for more details).
The impact of hospital consolidation—Update | THE ROBERT WOOD JOHNSON FOUNDATION | THE SYNTHESIS PROJECT, POLICY BRIEF NO. 9 | 5
A major next step for research in this area is sorting out the factors that determine
whether competition will lead to increased or decreased quality. Whether competition
leads to increased or decreased quality depends on its relative impacts on how
responsive hospital choice is to price versus quality. Future research can focus on trying
to recover estimates of these key elements, as well as understanding institutional and
policy factors that affect the competitive environment.
Table 4: Summary of hospital quality-competition studies with market determined prices
since 2006
Author/
Year
Location
of data
Time frame
of analysis
Does
competition
increase
quality? Results
Sohn and
Rathouz (2003)
California 1995 Yes Competition reduced angioplasty
mortality.
Encinosa and
Bernard
(2005)
Florida 1996–2000 No Low hospital operating margin
(possibly due to competition) led to
more patient safety events.
Propper et al.
(2004)
England 1995–98 No Hospitals facing more competitors
had higher mortality rates in a
deregulated environment.
Capps
(2005)
New York 1995–2000 Yes Hospital mergers had no impact on
many quality indicators, but did lead
to increases in mortality for AMI and
heart failure patients.
Propper et al.
(2008)
England 1991–99 No Mortality increased at hospitals
with a larger number of competitors
following deregulation.
Howard
(2005)
US 2000–02 Yes Demand for kidney transplants is
responsive to graft failure. As demand
becomes more responsive, hospitals
have to compete harder to attract or
retain patients.
Abraham et al.
(2007)
US 1990 Yes Quantity increases with the number
of hospitals. This will happen only if
quality increases or price falls. This
therefore implies that an increase in
the number of hospitals increases
competition.
Cutler et al.
(2010)
Pennsylvania 1994–95,
2000,
2002–03
Yes Removing barriers to entry in the form
of certificate of need laws led to entry
and increased market shares for low
mortality rate CABG surgeons.
Escarce et al.
(2006)
California,
New York,
Wisconsin
1994–99 Yes Mortality for patients with a variety
of conditions is lower in less
concentrated markets in California
and New York. There are no effects in
Wisconsin.
Rogowski et al.
(2007)
California 1994–99 Yes Mortality for patients with a variety of
conditions is lower where hospitals
have more competitors.
Romano and
Balan (2011)
Chicago
Primary
Metropolitan
Statistical
Area (PMSA)
1998–99,
2001–03
Yes A hospital merger in the Chicago
suburbs had no effect on some quality
indicators, and harmed some others.
PHYSICIAN-HOSPITAL
CONSOLIDATION, CONT.
Consolidation is often motivated
by a desire to enhance bargaining
power by reducing competition.
Burns et al. (10) find that hospital-
physician alliances increase
with the number of HMOs in the
market. They infer that providers
may be consolidating in order to
achieve or enhance market power.
More recently, Berenson et al. (6)
conducted 300 interviews with
health care market participants, and
reported that increased bargaining
power through joint negotiations is
one of several reasons for hospital-
physician alliances.
Ciliberto and Dranove (12) and
Cuellar and Gertler (14) are
econometric studies that examine
the impact of physician-hospital
consolidation. Both papers look
at the effects of physician-hospital
consolidation on hospital prices.
The two studies find opposite
results—Cuellar and Gertler
find evidence consistent with
anticompetitive effects of physician-
hospital consolidation, while Ciliberto
and Dranove find no such evidence.
It appears that consolidation is often
motivated by a desire to enhance
bargaining power by reducing
competition, but the limited evidence
on whether this leads to higher
hospital prices is mixed.
Physician-hospital consolidation is often
motivated by enhanced bargaining power.
6 | THE SYNTHESIS PROJECT, POLICY BRIEF NO. 9 | THE ROBERT WOOD JOHNSON FOUNDATION | The impact of hospital consolidation—Update
Additions to the evidence base since the 2006 research synthesis reinforce
the findings that hospital competition leads to lower prices. The expanded
evidence on competition and quality shows that competition leads to
higher quality when there are administered prices. The evidence is less
straightforward when prices are market determined, although the majority of
studies show that competition improves quality. Our review of the research
on physician-hospital consolidation does not suggest that such consolidation
(absent true integration) will lead to cost reductions or clinical improvement,
and may lead to enhanced market power for providers.
Policy developments since the 2006 synthesis give policy-makers both some
cause for optimism and some cause for concern.
> The FTC’s recent successes in blocking horizontal hospital mergers
should prevent further consolidation, thereby constraining price
increases and likely improving the quality of care.
> Nonetheless, many hospital markets remain highly concentrated and
noncompetitive. And, the prospect that the ACA could encourage
greater physician-hospital consolidation gives some cause for concern.
> While the current evidence base is not very supportive of initiatives
to encourage physician-hospital integration, given the current
interest in this kind of consolidation and the promotion of ACOs and
bundled payments, more evidence is clearly needed on the impacts of
consolidation on costs, quality and prices.
Conclusions and
Policy Implications
THE SYNTHESIS PROJECT (Synthesis) is an initiative of the Robert Wood
Johnson Foundation to produce relevant, concise, and thought-provoking briefs
and reports on today’s important health policy issues.
PROJECT CONTACTS
David C. Colby, Ph.D., the Robert Wood Johnson Foundation
Katherine Hempstead, Ph.D., the Robert Wood Johnson Foundation
Sarah Goodell, M.A., Synthesis Project
SYNTHESIS ADVISORY GROUP
Linda T. Bilheimer, Ph.D., National Center for Health Statistics
Jon B. Christianson, Ph.D., Universit y of Minnesota
Paul B. Ginsburg, Ph.D., Center for Studying Health System Change
Jack Hoadley, Ph.D., Georgetown University Health Policy Institute
Haiden A. Huskamp, Ph.D., Harvard Medical School
Julia A. James, Independent Consultant
Judith D. Moore, Independent Consultant
William J. Scanlon, Ph.D., National Health Policy Forum
Michael S. Sparer, Ph.D., Columbia University
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