Last week, the American Hospital Association released a study by Kaufman Hall, its preferred data vendor, that took issue with methodologies used by critics of hospital consolidation:
“These findings suggest that a more comprehensive analysis of hospital M&A transactions, one that considers impacts on all patients served, broadens the focus to impacts beyond pricing, and considers the consequences if an M&A transaction is not permitted to proceed, would ensure not only competitive but also healthy hospital markets that can continue to provide the fullest possible range of services.”
The report discusses how hospital merger reviews should look beyond the potential impact on commercial insurance prices and consider what proposed transactions mean for all patients, particularly the nearly 60% of hospital patient days attributable to Medicare, Medicaid and Medicare Advantage beneficiaries whose payment rates are largely set by government programs.” Drawing on analyses of challenged and canceled transactions, the report also finds that hospitals seeking partners often serve more vulnerable communities and face greater financial pressures, and that when proposed deals do not move forward, struggling hospitals can experience significant financial deterioration that threatens services, workforce stability and access to care.”
Kaufman Hall added this disclaimer: “The findings contained in this document may contain predictions based on current data and historical trends. Any such predictions are subject to inherent risks and uncertainties. Past performance is not necessarily indicative of future results. Kaufman Hall accepts no responsibility for actual results or future events.
Also last week, a Health Affairs commentary “In 2026, States Are Leading On Health Care Affordability” noted that “Research has consistently shown that hospital prices are the largest driver of commercial health care spending growth. Hospital markets are dominated by monopolies, which enable hospitals to charge higher prices without improving quality or outcomes. State policymakers are increasingly looking for options to limit excessive hospital prices. Our research shows that capping the highest, most egregious prices charged by hospitals can meaningfully improve health care affordability while still allowing hospitals to generate a healthy margin…
A key driver of rising health care prices is consolidation in health care systems, including through hospital acquisitions of physician practices. These acquisitions, which are a form of vertical integration, increase hospital prices by 3 to 5%. This can be attributed to greater bargaining power, more intensive coding practices, and hospitals charging facility fees at what were previously independent physician practices but are now treated as “hospital outpatient departments.” To address these issues, states are increasingly considering facility fee bans or “site-neutral” policies that would cap prices for certain routine hospital outpatient services that could be provided safely in an office setting.”
Both positions are defensible.
Not for profit and public hospitals are at a disadvantage in managing their finances because they’re obligated to serve entire communities without regard to local economies or population health. Investor-owned hospitals and insurance companies have fewer restrictions and can exit markets at will.
And almost every hospital is dependent on reimbursement from commercially insured patients to offset what is the widely-accepted calculus that Medicare and Medicaid reimbursement doesn’t cover the total cost of care provided enrollees. Thus, across the hospital industry, the playbook has been straightforward: to optimize hospital finances….
- Maximize the attractiveness of hospital services that attract privately insured patients via contracting with private insurers.
- Negotiate favorable rates with private insurers to enhance cost-shifting to Medicare and Medicaid by private plans.
- Optimize leverage (scale) over insurers by consolidating hospitals, acquiring physician practices, expanding ancillary activities and deploying capital to potentially profitable ventures.
- Advocate for state and federal laws that dissuade hospital price caps, 340B cuts, site-neutral payments, unreasonable price transparency requirements and limits on private-equity partnerships.
- Assert that hospitals are efficient stewards of the public’s trust but disadvantaged by corporate insurers and drug companies that are allowed to enter and exit markets at will, price at “what the market will bear” and put shareholder profit above all else.
This scheme has worked for 40 years to enable hospitals to control at least 50% of total health spending: 31% for traditional hospital services, 12% of total physician services, and ventures, partnerships, ancillary services and post-acute services in addition. In the aggregate, hospitals are the most important cog in the healthcare wheel. They’re labor intense, capital intense, complicated businesses that enjoy public trust that’s slipping away, especially among the 25 million who work in the industry. Complicating matters, distinctions between rural and government safety net hospitals and highly profitable investor-owned and not-for-profit systems are attracting unwanted scrutiny from regulators and in media coverage.
While Kaufman Hall raises legitimate questions about current methodologies used by state and federal regulators to assess consolidation, it does not answer the bigger question: what role should hospitals play in the U.S. system as AI-derived clinical innovation proliferates, labor and supply costs accelerate and fewer people can afford services?
It’s not clear.
- Should “hospital services” be redefined bifurcating facility-dependent inpatient services (Part A) and an expanded set of services inclusive of self-care provided in homes, schools, workplaces and virtually?
- Should “community-benefits” and “charity care” be redefined so that methodologies are consistent and gaming to receive tax benefits eliminated?
- Should hospital clinical performance be linked to improved outcomes and lower costs (affordability)?
- Should local primary care and preventive health services (inclusive of nutrition, physical and mental health, prophylactic dentistry) be integrated with hospital services to improve population health and control demand for hospital services?
- Should specialized tertiary and quaternary hospital programs be rationalized to optimize outcomes and improve efficiency?
- Should consolidated hospital systems disclose administrative costs, functions and allocation methodologies publicly?
- Should hospital boards be required to conduct scenario planning that’s comprehensive?
- Should hospital administrative services and costs be standardized to facilitate caps on spending and management performance comparisons?
- Should physician ownership of hospitals be enabled to increase competition?
And many others.
The American Hospital Association is right to be concerned about how regulators are addressing hospital consolidation and its impact on prices. And they’re right to challenge methodologies applied to questions about hospital prices and competition. But they fall short in offering a vision for the future of the health system that’s plausible, affordable and compelling. Rather, they offer a hospital-centric vision based on suspect assumptions and inadequate sensitivity to market trends not directly associated with traditional health services.
Every stakeholder in the health system—including hospitals and physicians—face heightened pressure to eliminate unnecessary utilization and costs due to willful or unknowing fraud. Just as insurer prior authorization practices have been frustrating to providers, unnecessary care is confounding to regulators and employers. The use of agentic AI tools to examine appropriateness of tests, procedures, medications and visits will exponentially change how “quality of care” is defined and regulated, and how its delivered. It’s a big deal everywhere, especially in Medicaid programs.
