Hospital, Health Insurance Consolidation Has Led to Higher Prices, Witnesses Say

Reproduced with permission from BNA's Health Care Daily Report, 176 HCDR (Sept. 12, 2011). Copyright 2011 by The Bureau of National Affairs, Inc. (800-372-1033) http://www.bna.com

September 13, 2011 -- Consolidation among hospitals and health insurers has led to higher prices, and the government needs to take action to ensure more competition, according to witnesses who testified Sept. 9 to the House Ways and Means Committee's Subcommittee on Health.

“There's been a tremendous amount of consolidation in this industry, and this represents a serious problem,” Martin Gaynor, a professor of economics and health policy at Carnegie Mellon University in Pittsburgh, testified at the hearing on health care industry consolidation.

Most hospital markets in the United States are highly concentrated, Gaynor said. Recent data show that the health insurance market for large employers has become more concentrated since 2004. Also, a 2009 Government Accountability Office report found evidence that the small group health insurance market is highly concentrated as well, he said.

Hospital consolidations have led to price increases that in some cases are “well over 50 percent,” Gaynor said. There is no evidence to show that cost savings from integrating facilities are passed on to consumers, he said. Instead, increased prices are passed on to private health insurance plans, which pass the increases on to employers, who then pass them to workers in the form of lower total compensation, he said.

Insurance premiums are higher in more concentrated markets, specifically for large employers, Gaynor said. Recent research shows substantial market power in the Medigap supplemental insurance market for Medicare beneficiaries, which is “dominated by a couple large insurers,” he said.

Older research shows that competition has a large effect on premiums in the Medicare+Choice and Medicare Advantage markets, he said.Gaynor recommended that antitrust enforcers prevent “integrations that foreclose the possibility of competition in the future.” He added that it is important to ensure that consumers have information they can “understand and use.” Rate regulation is a policy option as well in markets that are too concentrated, he said.

Consolidation Does Not Lead to Efficiencies

Research has shown that after hospitals merge, they increase prices significantly to people with private health insurance, subcommittee Chairman Wally Herger (R-Calif.) said in his opening remarks. “Unfortunately, research has not shown that such consolidation leads to greater efficiencies or improved quality,” he said.

In addition, insurance plan consolidation “leaves consumers with fewer coverage options and providers with fewer carriers paying claims,” Herger added.The Patient Protection and Affordable Care Act “has made a challenging situation worse, as all signs point to the law leading to even greater consolidation as providers try to blunt the impact of the law's one-half trillion dollars in Medicare cuts and massive new regulations,” he said.

Higher prices have been a more important driver of spending trends recently than volume growth, Paul Ginsburg, president of the Center for Studying Health System Change, testified. He is also research director of the National Institute for Health Care Reform.

“We see a pattern of very expensive variation in prices paid by private insurance as a percentage of Medicare rates, both by market and by providers within the market,” Ginsburg said. Some hospital rates to private insurers are four times Medicare payment rates, he said.

That is due to increased provider consolidation, both through mergers and through attrition of weaker providers, Ginsburg said. Backlash against managed care systems in the 1990s led to demands for growing provider networks, he said. Employers are demanding “must-have providers” with a reputation for quality or a large share of the market, which are able to get much higher rates from insurers because of insurers' inability to exclude them from their networks, he said.

Hospitals' Employment of Doctors

Hospitals' employment of physicians is causing rising prices, because hospitals can negotiate higher payment rates for doctors from insurance than small practices can, Ginsburg said. This can lead to higher prices for hospital services, including higher charges to Medicare and Medicare beneficiaries, he said.

The practice “has developed very rapidly,” Ginsburg said. “In some communities, a large majority of physicians are employed by hospitals.”

Some industry observers have seen the practice as a step to prepare for delivery and payment reforms under PPACA. Among those are accountable care organizations that are intended to coordinate care and bundled payments in which providers are paid for “episodes” of care, Ginsburg said.

The employment practice is predominantly intended to “garner more patient referrals and expand optimal specialty service lines and increase market power with providers,” he said. “This is a highly attractive strategy today, under volume-driven fee-for-service financing.”

Some employers have adopted benefit designs to select providers based on price and quality, Ginsburg said. But provider ability to resist tiered design by refusing to contract “is a serious barrier.”

The government should develop methods for measuring value, and it should limit provider contracting practices that interfere with cost-conscious choices by enrollees, Ginsburg said. Changing the tax treatment of employee health benefits, under which employees pay no income tax on employer-provided health insurance, “is another option” to combat escalating costs, he said.

However, “there's a major question about how effective market approaches can be because some markets are already too concentrated, and consumers did not react well to some of these approaches in the late 1990s,” Ginsburg said.

If market forces do not work, rate-setting at the state level should be considered, Ginsburg said. Rate reviews could be triggered by high rates in relation to Medicare, or there could be a “much more structured system,” he suggested. “The key is to designing such interventions so that they foster or accommodate payment reform.”

Medicare Has Market Advantage

“Medicare has an advantage in the market,” said Rep. Pete Stark (D-Calif.), ranking member of the subcommittee. “It's a national program and it pays defined rates.”

“A Medicare-for-all, or all-payer system, might be the best answer for our health care system in the future,” Stark said. “With that system we get the advantages of integration, increased efficiency, quality, and reduced waste, without having to worry about price consequences.”

David Balto, senior fellow at the Center for American Progress Action Fund, agreed. “You see much greater efficiencies in the Medicare system,” he said.Balto said “almost all health insurance markets in the United States are heavily concentrated.” This has led to “skyrocketing premiums, [and] consumers harmed by egregious and deceptive conduct by health insurance companies,” he said.

PPACA “gives us tools to deal with some of these problems,” Balto said. He applauded the Obama administration for allowing “no more consolidation when it comes to health insurance.”

Express Scripts, Medco Merger

But Balto said an area where the antitrust enforcers have been “asleep at the switch” is pharmacy benefit managers, which play a crucial role in managing drug benefits.

Two of the three managers, Express Scripts Inc. and Medco Health Solutions Inc., are planning to merge, he noted. The merged company would have more than 50 percent of the large plan market, and it would cover more than 150 million people, he said.

Balto represents consumer groups, unions, and specialty pharmacies in advocating against the merger before the Federal Trade Commission.

The companies announced their intent to merge in late July. On Sept. 2, they said they received a second request for information from the FTC on the proposed merger.

In a separate action, three Democratic members of the House Energy and Commerce Committee sent a letter to FTC Chairman Jon Leibowitz Sept. 9 asking for “close scrutiny” of the proposed merger.“

The merger would shift the balance of competition in the [pharmacy benefit manager] market,” said the letter, signed by ranking member Henry Waxman (D-Calif.) and Reps. Frank Pallone (D-N.J.), and Diana DeGette (D-Colo.).

The merger would affect “hundreds of millions of Americans with private health insurance and have a potentially significant impact on drug cost for government programs,” such as Medicare Part D, Medicaid, and the Federal Employee Health Benefits Plan, the letter said.

Testimony from the health subcommittee's hearing is at http://waysandmeans.house.gov/Calendar/EventSingle.aspx?EventID=258108.

The letter from three House Democrats to the FTC chairman is at http://democrats.energycommerce.house.gov/sites/default/files/documents/Letter_Leibowitz_09.09.11.pdf.