How hospitals protect high prices

Large hospital systems don’t command high prices just because patients like them, or just because they have strong market share. There’s also another big reason: their contracts with insurance companies actively prohibit the sort of competitive pressures a free market is supposed to support.

“The free market has been distorted in an unhealthy way,” health care consultant Stuart Piltch told the Wall Street Journal’s Anna Wilde Mathews for this deep dive into hospitals’ pricing practices.

How it works: Hospital systems are consolidating rapidly and buying up physicians’ practices (which charge higher prices once they’re part of a hospital).

On top of that, per WSJ: Hospitals’ deals with insurance companies “use an array of secret contract terms to protect their turf and block efforts to curb health-care costs.”

  • Some hospitals do not allow their prices to be posted on the comparison-shopping sites insurers provide to their customers.
  • They often require insurers to cover every facility or doctor the hospital owns, and prohibit insurers from offering incentives — like lower copays — for patients to use less expensive competitors.
  • When Walmart, the country’s biggest private employer, wanted to exclude the lowest-quality 5% of providers from its network, its insurers couldn’t do so because of their hospital contracts.

The other side: Hospital executives told the Journal that mergers don’t drive higher prices, and reiterated their position that hospitals have to collect higher payments from private insurance to make up for the lower rates they get from Medicare and Medicaid.

My thought bubble: High-deductible health plans are increasingly popular, in part, because of the idea that patients will use their purchasing power to drive a more efficient system overall.

  • But if Walmart doesn’t have enough market power to actually penalize low-quality providers, you and I definitely don’t, either — especially if we can’t find out what the prices are, and especially if we only have one hospital to choose from in the first place.

Go deeper: Think drug costs are bad? Try hospital prices



Creating Effective Health Care Markets

Building a health care market

Disagreement about the role of markets lies at the root of many of our fiercest health care controversies. One side believes that unleashing market forces will rescue our health care system. From this viewpoint, government involvement is inherently destructive, except in rare circumstances. Many opponents of the Affordable Care Act share this opinion.

The other side believes that health care markets are deeply flawed and that government must play a major role in achieving a higher-performing health system. These people point out that markets make no claim to ensuring equity in the use of health care resources, only improved efficiency. Supporters of the ACA tend to hold this view.

Given this fundamental divide, it’s worth considering the conditions underlying the effective functioning of market economies, whether those conditions currently prevail in health care and, if not, what changes would be required to establish them.

Students learn in Economics 101 that several assumptions must hold for free markets to achieve their potential:

  • First, consumers and suppliers of goods and services have perfect — or at least sufficient — information. They know or can find out the price and quality of available products.
  • Second, consumers and producers are rational. They make reasoned decisions about what to purchase and supply. These decisions maximize their welfare as consumers and their profits as businesses.
  • Third, it is easy for producers to enter markets, thus assuring that monopolies don’t form, and that increased competition occurs where prices are excessive, reducing prices to efficient levels.
  • Fourth, in any market, there are large numbers of firms selling a homogeneous product.
  • Fifth, individual firms cannot affect market prices.

Practically speaking, these conditions rarely exist in pure form anywhere in our economy. In the case of health care, there are a variety of different types of markets. For example, employers purchase insurance, large hospital systems purchase medical supplies, and individuals purchase insurance plans. These markets may embody these conditions to varying degrees, but the most basic health care markets, in which consumers or patients directly buy health care services, depart from this ideal dramatically, as the following examples illustrate.

To begin with, health care consumers not only lack perfect information, but often any information at all.   At present, prices in the U.S. health care market are virtually unknowable. Quality data are scant, imperfect, and often confound even experts.  Further, medicine is a complex science-based service: even highly trained health professionals struggle to stay current. As a result of social media and the internet, consumers are better informed than ever before, but most depend on advice from health professionals to make informed health care purchases. This kind of imperfect information may help explain why consumers in high-deductible health plans are equally likely to reduce their use of high-value or low-value health care services. They are just as likely to forgo their blood pressure treatments as unnecessary back surgery.

Health care consumers also face unusual challenges to making rational decisions. In medicine there is a saying that any doctor who treats herself has a fool for a patient. Even the most informed individual can have difficulty acting rationally when confronting the emotional turmoil that accompanies their own illness or that of a loved one. Beyond this, there are clear situations where patients’ cognitive abilities are compromised, for example, in cases of stroke, dementia, intoxication, loss of consciousness, delirium, or mental illness.

Competent patients have the inherent right to make their own medical decisions, and many do so wisely and well. But market advocates also must recognize the special obstacles to rational decision-making that face health care consumers.

Consolidation among insurers and health care organizations has radically reduced the number of providers selling health care and health insurance in many U.S. health care markets. Recent work shows that providers in 90 percent of U.S. markets are highly or “super” concentrated.

This consolidation and resulting lack of competition has enabled individual providers to charge excessive prices in many markets. Similarly, government-granted patents create monopolies that enable drug manufacturers to set astounding prices for new drugs and raise them almost at will.

These and other departures from the conditions necessary for effective market functioning suggest the dangers of uncritical reliance on free markets to improve our health care system. At a minimum, advocates of market solutions would be wise to consider three interventions that could increase the probability that markets will function as desired.

  1. Develop better information on prices and quality. Consumers need information to make informed decisions. Publishing raw data on the prices of care — often referred to as price transparency — is insufficient because it rarely reflects the actual cost consumers face during an episode of care. The price of a chest x-ray that diagnoses pneumonia, for instance, is a poor indicator of the costs of a subsequent hospitalization, not to mention the downstream costs for any previously undetected lung disease. To make health care markets work, advocates must develop approaches to price transparency and quality measurement that are meaningful and understandable to consumers.
  2. Foster markets for health services that pose the smallest challenges to rational decision-making. Certain health services — often referred to as “shoppable” — involve tests or treatments that are either elective, relatively simple to understand, or nonurgent, which allows patients time to learn and think about them. Examples include screening tests for generally healthy individuals (e.g., colonoscopies, mammograms), elective surgeries (e.g., hip and knee replacement), or necessary but nonemergent care (e.g.,whether to add insulin to a diabetic regimen). Fostering competitive forces in these areas could improve the functioning of the health care market overall. But reformers should be aware that these services are likely to account for a minority of health care activities and, frequently, are not the most expensive ones.
  3. Promote competition. Unless government finds ways to restore competition among providers where it no longer exists, markets can’t succeed. This is true both for health care services generally and pharmaceuticals in particular.

Given our desperate need for health care reform, the appeal of market solutions is understandable. But it is naïve to assume that they will work in health care just like they do in other sectors. It is time for a frank, open, and nonideological discussion of the problems markets can address in health care and how we can create conditions that will enable markets to function as intended.



Health care mega-mergers may get green light from feds

The Department of Justice headquarters in Washington, D.C.


Antitrust regulators at the Department of Justice are expected to approve two major health care deals — CVS Health’s $69 billion buyout of Aetna and Cigna’s $67 billion deal for Express Scripts — within a matter of weeks, the Wall Street Journal reports.

Why it matters: The health insurance and pharmacy benefits industries would be even more heavily consolidated than they currently are, which has worried consumer advocates and providers. The WSJ reports the only required antitrust remedies would be for CVS and Aetna to divest overlapping assets in their Medicare prescription drug plans.



Market Concentration Variation of Health Care Providers and Health Insurers in the United States

Market concentration will cause high prices


Over the past several decades in the United States, more and more health care providers and health insurers have consolidated, increasing their market power.1,2Highly concentrated markets have contributed to the growth in U.S. health care spending because they are associated with higher health care prices and insurance premiums, yet are not typically associated with higher quality of care.2-4 Given that states play a large role in regulating health care provider and insurer markets, it’s important to understand how concentration levels vary across the country, as well as examine the relative concentration levels between providers and insurers at the local level. Our previous research has shown that in markets with both high provider and insurer concentration, insurers have bargaining power to reduce prices, yet consumers and employers don’t usually benefit.5Regulators can use this information to determine if policies are needed to protect consumers, as well as employers that provide health benefits to their workforces.

To illustrate health care market concentration variability across the United States, we tabulated the market concentration of health care providers — hospitals, specialist physicians, and primary care physicians — and health insurers for each metropolitan statistical area (MSA) in 2016 using the methods and data described in the Appendix. Regulators classify markets into categories that range from unconcentrated to moderately concentrated to highly concentrated.6 We created a fourth category called “super concentrated,” to distinguish among the most concentrated markets (see the Appendix for details).

Market Concentration Levels Across the United States

When looking at market concentration levels across the United States, we found that, for both providers and insurers, the concentration levels varied, typically between two concentration categories (see table). For providers, the vast majority of the MSAs were at the concentrated end of the spectrum, either being highly concentrated (47.1%) or super concentrated (43.0%). By comparison, for insurers, almost all the MSAs fell into the middle categories, either being highly concentrated MSAs (54.5%) or moderately concentrated (36.9%).

When examining the relative concentration between providers and insurers, providers generally had the upper hand. Provider concentration was in a higher category relative to insurers in 58.4 percent of the MSAs, while the opposite was true in only 5.8 percent of the MSAs.

State and Federal Scrutiny Is Needed

This study shows that health care market concentration levels vary across the United States. To protect consumers and employers from high prices and premiums, state-level regulatory scrutiny — coupled with federal regulatory scrutiny — of potentially anticompetitive behavior is needed. State officials better understand the nuances of their local markets and are able to ascertain what steps, if any, may be required. For example, more populous MSAs may have lower measured concentration levels because they comprise more than one market. And even if a market is found to be highly or super concentrated, regulators should examine other competitive factors that may mitigate the potentially harmful impact of high concentration. These might include whether it is easy for competitors to enter a market or if there are economies of scale that might lead to lower costs.6 For example, as health care diagnoses and treatments become more complex, larger, more-integrated, and well-capitalized health care providers may be better equipped to lower costs and improve quality. Still, it is important for regulators to increase the likelihood that the benefits of consolidation ultimately flow to consumers and employers.

AT&T, Time Warner, and the Future of Health Care

AT&T Time Warner Merger

Policymakers and private actors should not interpret a federal court’s AT&T and Time Warner ruling as an unconditional green light for vertical integration in health care.

The need for change in the U.S. health care system is obvious, but whether vertical integration is the change we need remains to be determined.

The recent federal district court ruling allowing the merger of AT&T and Time Warner — a case of so-called vertical integration — will likely encourage similar unions throughout the U.S. economy, including in health care. Nevertheless, a close look at the court’s decision, and at the wide variety of vertical health care mergers under way, suggests that policymakers and private actors should not interpret the court’s ruling as an unconditional green light for vertical integration in health care, or any other sector.

Vertical integration typically involves the combination of entities operating on different parts of a supply chain in the production of a particular product. Manufacturers of tires, for example, are part of the supply chain that results in a finished automobile. Similarly, ambulatory physician services are sometimes seen as an input on the supply chain of more advanced hospital services. The acquisition of physician practices by hospitals is often characterized as vertical integration.

Some antitrust experts question whether the analogy between manufactured products and health care delivery is accurate. Independent physicians, for example, often work within hospitals and help to produce their “products.” Nevertheless, there are clear differences between mergers across the same types of health care organizations, like hospitals, and those between different types of providers, like physicians and hospitals.

The AT&T/Time Warner case was the first time in 40 years that the government has taken a proposed vertical integration to court, and many commentators have noted that antitrust theory with respect to vertical integration could use some updating. In the meantime, however, Judge Richard Leon’s 172-page opinion seems to have relied on traditional antitrust considerations: would the merger increase or decrease competition, and thereby increase or decrease consumer welfare? His ruling rested heavily on what he viewed as the government’s failure to supply evidence that the merger would have adverse effects. In other words, if the government had produced more convincing data, the ruling could have gone the other way.

Judge Leon’s ruling may be appealed and, if so, may not stand. But if it does, what are its implications for vertical integration in health care? Simply put, the facts matter. And unfortunately, the facts about vertical integration in health care are obscure, and likely to vary enormously according to the details of the merger and from market to market.

Evidence on the effects of horizontal health care mergers has grown considerably in recent years, and generally shows that they increase prices. But studies of vertical health care mergers are much less common. Perhaps the most relevant experience concerns long-standing integrated health systems, such as Kaiser Permanente, Intermountain, Geisinger, and a handful of similar organizations.

Widely regarded as industry leaders in quality and efficiency, these systems seem to demonstrate the benefits of vertical integration: they are able to coordinate services across different types of providers, and, when incentives encourage it, they can easily substitute less expensive services (e.g., ambulatory care) for more expensive ones (e.g., hospital care). However, whether the experiences of these integrated systems are generalizable to the current flock of mergers is unclear. Each of these venerable organizations has a unique history and culture that have shaped its performance over decades.

Studies of vertical integration will have to take into account the type of merger under consideration. The most common type of vertical integration seems to be the acquisition of physician groups — both primary care and specialty — by hospitals. Between 2012 and 2016, the number of hospital-employed U.S. physicians increased from 95,000 to 155,000.

But health care is witnessing a variety of other types of vertical integration. Insurers are buying physician groups, as in the case of UnitedHealth Group’s acquisition of parts of DaVita’s physician network. Drug store chains are buying insurers, as in the case of CVS’s purchase of Aetna. And integrated health systems like Partners HealthCare are proposing to buy insurers like Harvard Pilgrim Health Care.

The effects of these varied mergers will depend on the types of services being combined and the markets affected. From both a societal and legal standpoint, the facts matter.

For example, it turns out that the CVS-Aetna merger includes an important horizontal union between Part D health plans owned independently by CVS and Aetna. Part D health plans provide drug coverage to Medicare beneficiaries. In recent testimony before the California Department of Insurance, economist Richard Scheffler showed that in a number of markets, the merger of these Part D plans would significantly reduce competition, and thereby, could potentially increase the prices of drug coverage for Medicare patients. Fear of consolidation among Part D plans has caused the American Medical Association to oppose CVS’s acquisition of Aetna.

Adding to the uncertainty surrounding these questions is the unique nature of the health market, in which governments are the largest purchasers and consumers often don’t know the prices or value of the products they buy. Traditional competition in local markets sometimes results in radically increasing prices and costs, as providers pile on new technologies and facilities and compete for star physicians in an effort to attract customers. And many parts of health care already have a high degree of consolidation that limits price competition.  The result is a level of dysfunction that has created an almost universal cry for radical disruption of the status quo.

Health care is a conundrum on many levels, and how and whether to regulate vertical integration among its varied components may turn out to be another one. The need for change is obvious. Whether vertical integration is the change we need, and how the courts will treat it, remain to be determined.



Image result for healthcare conglomerates


Recent moves to consolidate insurance customers under one corporate structure could lead next to carriers acquiring hospital networks.

The continued market consolidation and efforts to create an “all-in-one” approach to healthcare insurance customers may lead to carriers acquiring large hospital networks, particularly if the CVS-Aetna transaction proves to be successful and profitable, one analyst says.

The mergers and acquisitions in the insurance industry over the last year is the preamble for what will happen over the next two years, says CEO of Tom Borzilleri of InteliSys Health, a company aimed at bringing greater transparency to prescription drug prices, and the former founder and CEO of a pharmacy benefit manager (PBM).

The effort will ramp up to include hospitals if health plans start seeing financial rewards from the recent moves, he says.

“We are seeing carriers acquiring PBMs, as with Cigna/Express Scripts, and pharmacy chains/PBMs acquiring carriers, like CVS/Aetna, in search of cost efficiencies to increase earnings,” he says. “One may view these mergers and acquisitions as a favorable strategy to delivering both cost savings and patient convenience, but this strategy also has the potential to produce a serious negative effect on other critical stakeholders like doctors, hospitals, clinics, and others.”

In the past, many carriers managed their pharmacy benefits internally and found that it would be more cost-efficient to outsource that function to third-party PBMs, Borzilleri notes.

“As the PBM industry grew significantly over the last decade, allowing PBMs to gain market share and buying power for the millions of lives they managed, it opened the door for PBMs to methodically profiteer at the expense of both the carriers and their insured through the vague and complicated contracts for services the carriers were forced to sign,” he says.

Borzilleri continues, “In essence, the carriers really didn’t know what they were paying for at the end of the day for these services. As the market began to change with the onset of a movement and demand within the industry for more price transparency, carriers began to realize that they would be better served to bring the PBM function back in-house to reduce costs and increase earnings.”


Borzilleri explains that a merger like the CVS-Aetna acquisition provides the insurer the ability to:

  • Control drug costs by eliminating the profits that the PBM formerly enjoyed
  • Realize cost efficiencies to dispense medications at the pharmacy level
  • Directly employ the providers that can treat their members at a cost much lower than the reimbursement rates they currently pay their network doctors
  • Create a brand-new revenue stream from the retail products sold in these stores

That brings a ton of reward to CVS-Aetna, but not to anyone else, Borzilleri says.

“This type of closed-loop network will limit patient options to everything from who will be treating them, where they will be treated, and how much they will be forced to pay for services and their prescriptions,” he says.

“Based on the millions of patient lives that both CVS-Caremark and Aetna manage, patients will be herded into their own locations to be treated by their own doctors/providers and the independent physician or practice will be significantly impacted. So in essence, both the patients and doctors who treat them will lose,” Borzilleri says.


Hospital acquisition also could be driven by consumers, says Bill Shea, vice president  of Cognizant, a company providing digital, consulting, and other services to healthcare providers. As consumers select health services on demand, they will create their own systems of care instead of relying on a third party to do so, he says.

“The impact of these changes likely means integrated delivery systems must focus on providing on-demand healthcare and do so on a large scale. These systems can point to the proven value of offering a vetted and curated set of cost-effective providers and coordinating care to deliver better cost and quality outcomes,” Shea says.

Health plans also may consider returning to their pre-managed care origins to purse a classic insurance model of benefit design, risk management, and underwriting, he says. Some organizations could become a one-stop shop for every insurance need.

“These diversified insurance players will have the economies of scale to better manage profit and loss across multiple lines of business and to take creative approaches to health-related insurance, such as offering personalized policies targeted to specific market segments,” Shea says.


Consolidation is likely to increase at the state and regional level, says Suzanne Delbanco, PhD, executive director of Catalyst for Payment Reform.

“As providers with market dominance command higher prices, insurers will need to amass greater market power to push back. This means fewer choices of insurers for employers, other healthcare purchasers and consumers,” Delbanco says.

She says, “Fewer choices means less competition and less pressure to innovate. It’s possible we’ll see more of the integrated delivery systems and accountable care organizations beginning to offer insurance products where state laws and regulations allow them to as new entrants into the market.”

Those changes will make it more and more difficult to thrive as a small insurer or a small provider, she says.

Also, while rising prices and a continuation of uneven quality will motivate employers and other healthcare purchasers to demand greater transparency into provider performance and prices, larger players may more easily resist that call, she says.

“Increasingly it will be a seller’s game, not a buyer’s,” Delbanco says. “While quality measurement, provider payment reforms, and healthcare delivery reforms increasingly move toward putting the patient at the center, this may be more lip service than reality. Even if consumers end up with more information to make smarter decisions, their options may have dwindled to ones that are largely unaffordable.”


Viewpoint: Small hospitals should be hopeful and wary of national health systems


With Cleveland Clinic eyeing acquisitions at two locations on Florida’s Treasure Coast — Indian River Medical Center in Vero Beach and Martin Health System in Stuart — residents and hospital workers should be wary but hopeful, according to the local TC Palm.

That a national power in the healthcare industry wants to snap up two independent nonprofit hospitals in Florida is no surprise. The area’s patient population has the trifecta of demographics: aging, wealthy and insured, TC Palm‘s Gil Smart wrote. In an era of increasing expenses, declining reimbursements and growing powers, finding a partner system can give small hospitals more weight in negotiations and help fund capital for investments in growth and change.

Yet as examples have shown, allowing bigger players to come into local markets means change, and not all of it is good, Mr. Smart noted. Unions will have it tougher at the negotiation table and control will change hands.

“Bottom line: There will be a loss of local control. There always is, where the bigger, faraway healthcare system gulps down the local guy,” Mr. Smart wrote. “Yet we shouldn’t let the drawbacks overshadow the potential benefits of having a globally renowned healthcare ‘brand’ set up shop in our backyards.”

The benefits, such as easier, better and more coordinated care, are a lot to be hopeful for. Read the full column here.