This article first appeared in JAMANetwork.com. It is co-authored with Soleil Shah and Amol S. Navathe.
Amidst remarkable uncertainty for its future, one of the most concerning and constant trends in US health care has been the increasing consolidation of health delivery organizations. In health care, 2 main forms of consolidation exist. Horizontal consolidation occurs when hospitals or physician groups merge together, enabling the combined entity to increase its market share. For example, in 2015, Stanford Health Care merged with ValleyCare Health System, combining a 2-hospital 613-bed academic medical system with a 242-bed hospital. After hospitals merge, a market often becomes less competitive because of decreased hospital competition. Vertical consolidation occurs when a hospital increases its employed physicians by acquiring a physician practice. Between July 2016 and January 2018, hospitals acquired 8000 medical practices, and 14 000 physicians left private practice to become employed by hospitals.1 This process makes the physician market less competitive by reducing the number of physicians vying for patients.
The coronavirus disease 2019 (COVID-19) pandemic may exacerbate both types of consolidation. Sudden declines in utilization and revenue have threatened financial sustainability or imbued uncertainty into the future of some hospitals and physicians. In a July 2020 survey of 230 independent physician practices, 60 (26%) were considering partnering with a larger entity due to COVID-19.2 Furthermore, of 58 independent physicians without ownership in their practice, 23 (40%) considered employment, creating additional barriers for independent practices to remain competitive.3 Notable hospital mergers have also taken place within the pandemic period. In October 2020, Atrium Health completed a merger with Wake Forest Baptist Health, creating one of the nation’s largest health systems by consolidating 42 hospitals across 4 states (North Carolina, South Carolina, Georgia, and Virginia) with an expected $11 billion in combined net revenue.
Hospital consolidation in the past decade has not improved quality. Among 246 acquired hospitals and 1986 control hospitals, being acquired was associated with a moderate decline in performance on an aggregate patient experience measure (from the 50th percentile to the 41st percentile) but no significant changes in 30-day readmissions or mortality rates.4 Due to a lack of competition, the prices for services provided by physician practices tend to increase after acquisition.5 Additionally, legal limitations have weakened the ability of the Federal Trade Commission (FTC) to enforce antitrust rules on nonprofit hospitals, even though these hospitals are involved in the majority of hospital and health system mergers.6 Thus, consolidation and the creation of multistate hospital systems could continue to have potentially adverse consequences for patients. A new economic and policy framework designed to limit anticompetitive and therefore anti-consumer incentives by market-dominant hospitals (MDHs) may help mitigate the negative consequences of consolidation.
Factors That Influence Health Care Consolidation
Consolidation has been a predominant business strategy for hospitals and physicians in the United States for decades. Hospitals consolidate to gain market share and use resulting leverage to charge higher prices to private payers or employers large enough to self-insure. One major reason this may occur with relatively little resistance is the nature of health care markets. Numerous plans compete to offer health insurance to employers, and employers that self-insure must select from among these plans or third-party administrators (TPAs).
To attract employers, payers and TPAs strive to offer large networks of clinicians and health care centers to minimize care disruptions for employees. But when most physicians in a region are employed by a large hospital network, private payers and employers often have limited options other than to contract with that network, forcing them to tolerate 6% to 10% increases in prices each year.7 Adding to their leverage, these large networks often offer differentiated services like organ transplants or advanced specialty therapies that make them a “must-have” in private-payer or employer networks. Thus, the financial incentive for hospitals to merge or acquire physicians to gain must-have status is high.
Hospital consolidation is also supported by the nature of antitrust regulations, which are limited by how markets are defined. Since the 1990s, academics and regulators have defined local markets in health care using tertiary hospital catchment areas or hospital referral regions (HRRs). HRRs were constructed based on referral patterns of cardiovascular and neurosurgery hospitalizations from 1992-1993 Medicare data for research purposes.8 Yet these outdated HRRs meant for research are frequently used in antitrust enforcement today, despite the hospital mergers that have occurred since their development. In 2018, a review of community hospitals reported that 3491 of 5198 hospitals (67%) belonged to a multihospital health system, compared with just 2524 of 4956 (51%) in 1998.9
HRRs also usually encompass areas much larger than what is practical for most patients to conveniently access. In major metropolitan markets, patients often choose between one or 2 hospitals within a small radius of their residence.10 For example, the Manhattan HRR includes all 4 New York City boroughs other than the Bronx, even though most patients in Manhattan may not travel between boroughs for care. This means hospitals tend to have pricing power much greater relative to their defined market share in the HRR. Thus, using HRRs hampers antitrust regulators from adequately recognizing and responding to the local effects of hospital consolidation.
Now, as hundreds of independent physician practices and smaller hospitals experience revenue losses due to COVID-19, the economic incentive for hospitals to merge, acquire physician practices, or employ more physicians is likely increasing. Both forms of consolidation could lead to more MDH networks. Therefore, it is important for regulators to develop a framework that accounts for the true extent of market dominance among large hospital networks when determining their influence on prices.
A first step to addressing hospital consolidation is to update HRRs or develop a methodology for defining hospital markets based on more recent data and geographic care utilization patterns by patients. Regulators could consider localized health service use patterns to match patient choices with market definitions; for example, how likely is it for patients to cross bridges, county lines, or leave their cities for care. Medicare Payment Advisory Commission areas, which are metropolitan statistical areas within a state or rest-of-state nonmetropolitan areas, might be a desired middle ground between county-level and state-level definitions that could be evaluated. Regardless, the definition of hospital markets used in antitrust enforcement needs to be redefined using updated empirical analysis. It is even possible that market definitions will vary by service type (eg, hospital competition over heart valve replacement procedures vs obstetric care).
Once fair market definitions are established, hospitals with more than 50% market share for any service should be deemed as having an MDH label, which could serve as a warning signal for regulators and prompt scrutiny over anticompetitive practices of the new entity. Furthermore, MDHs could be required to accept all forms of public insurance and invest a fixed percentage of their total revenue into health care provisions for low-income or marginalized communities. This could help limit declines in quality and access that result from mergers.
MDH regulation could target horizontal consolidation but may not be sufficient to reduce vertical consolidation since the incentive for financially struggling physicians and smaller practices to be acquired by larger hospitals still exists. Vertical consolidation could be addressed if the federal government coordinated across sectors to create an MDH redistribution fund (MRF). The beneficiaries of the fund would be physician groups and hospitals in financial need, which would reflect their Medicaid case mix, critical access status, and perhaps revenue loss as a result of COVID-19 capacity constraints. MDHs that are nonprofit entities, and thus benefitting from less FTC scrutiny, could be required to donate 5% of their tax exemption to the MRF. The federal government could then redistribute the MRF proceeds to its beneficiaries as loans or, if the beneficiaries choose to remain independent, as grants instead. Insolvent or cash-strapped physician groups that would otherwise consider employment under a larger hospital could then have greater ability and incentive to remain independent. These efforts could help ensure physician markets remain competitive and offer consumers more choice.
COVID-19 has the potential to exacerbate the nation’s history of hospital consolidation. Stronger incentives to counteract consolidation could protect patients against potential adverse effects of anticompetitive hospital networks. Policy makers and regulators should consider legislation that defines and regulates MDHs, while promoting asset redistribution via an MRF, as a potential safeguard to the adverse consequences of the consolidation trend.Back to top
Corresponding Author: Robert P. Kocher, MD, Stanford University School of Medicine, 291 Campus Dr, Stanford, CA 94305-5450 (firstname.lastname@example.org).
Published Online: February 19, 2021. doi:10.1001/jama.2021.0079
Conflict of Interest Disclosures: Dr Kocher reported working at Venrock, a venture capital firm where he invests in health care businesses, and serving on a board for Premera. Mr Shah reported receipt of personal fees from The Advisory Board Company outside the submitted work. Dr Navathe reported receipt of grants from Hawaii Medical Services Association, Anthem Public Policy Institute, the Commonwealth Fund, Oscar Health, Cigna Corporation, the Robert Wood Johnson Foundation, Donaghue Foundation, the Pennsylvania Department of Health, Ochsner Health System, United Healthcare, and Blue Cross Blue Shield of North Carolina; other from Integrated Services (board member; not compensated) and Embedded Healthcare Equity; and personal fees from the following: Navvis Healthcare and Agathos (advisor services); Navahealth (principal); University Health System-Singapore and the Social Security Administration-France (advisor and travel); Elsevier Press (honorarium for editorial role); the Medicare Payment Advisory Commission (commissioner and travel); and the Cleveland Clinic (speaker fees and travel) outside the submitted work.
- Physicians Advocacy Institute. Updated physician practice acquisition study: national and regional changes in physician employment 2012-2018. February 2019. Accessed January 3, 2021.http://www.physiciansadvocacyinstitute.org/Portals/0/assets/docs/021919-Avalere-PAI-Physician-Employment-Trends-Study-2018-Update.pdf
- McKinsey and Company. Physician employment: the path forward in the COVID-19 era. July 17, 2020. Accessed November 22, 2020.https://www.mckinsey.com/industries/healthcare-systems-and-services/our-insights/physician-employment-the-path-forward-in-the-covid-19-era#
- Merritt Hawkins. Survey of America’s Physicians: COVID-19 Edition. August 19, 2020. Accessed February 17, 2021.https://www.merritthawkins.com/trends-and-insights/article/surveys/survey-of-americas-physicians-covid-19-edition/
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- American Hospital Association. Trendwatch Chartbook 2018. Table 2.1: Number of community hospitals, 1995–2018. Accessed January 3, 2021. https://www.aha.org/system/files/media/file/2020/10/TrendwatchChartbook-2020-Appendix.pdf
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