As the country faces the fiscal cliff and continued deficit challenges, controlling health care expenditures will require aggressive efforts. When we look at why costs are rising and what the remedies are, we need to examine carefully a growing and under-publicized phenomenon: provider consolidation and its role in rising prices. A new report by Catalyst for Payment Reform (CPR), an employer-led non-profit organization, describes the substantial impact this growing trend has on health care spending. Given that several aspects of health care reform indirectly and directly support consolidation, it is critical we understand this trend better and start discussing how to address it.

Health care spending is increasing, but not exclusively because patients are utilizing more, and more expensive, care.  Unit prices for hospitals and doctors are rising also, driving spending up, and evidence is mounting that the major contributor is ongoing provider consolidation. By 2006, over 75 percent of U.S. metropolitan statistical areas (MSAs) had experienced enough hospital merger activity to be considered “highly consolidated.” Nationwide, payments to hospitals on behalf of the privately insured are an estimated 3 percent higher than they would be absent hospital consolidation. In some specific cases, prices have gone up as much as 50 percent post consolidation. For example, when two competing Northern California hospitals, Summit and Alta Bates, merged, prices increased between 28 and 44 percent.

The situation is likely to accelerate as an unintended consequence of health care reform.  Reductions in Medicare payment rates will spur further hospital mergers as those institutions try to reduce costs and attain enough market leverage to raise prices to commercial payers.  In addition, Accountable Care Organizations (ACOs) may prompt consolidation. Despite the mounting evidence, and the potentially profound implications that provider consolidation and market power have for cost containment, we have given this issue short shrift.

Strategies For Addressing Consolidation

Transparency. Over the last decade we have seen the Federal Trade Commission and Department of Justice have limited success with anti-trust investigations, highlighting the need to bring in more market-based efforts that enhance competition among providers. Public information is the first step. Health care purchasers—including large employers, state employee groups and even Medicaid–can work with state leaders and health plans to spur the development and expansion of all-payer claims databases and voluntary, multi-payer claims databases. These “level the playing field,” giving consumers, plans and purchasers information about quality and prices for providers across the state.

Competition. By creating systems where consumers shop based on value, purchasers and policy makers can help foster provider competition; so while some provider systems may be getting larger, they won’t easily be able to set high prices and get the patient volume they have come to expect. When given comprehensive, user-friendly tools, consumers have proven they will make value-oriented choices. Over the long term, this can mean they choose providers that offer the best-value care, not the highest-priced care.  Reference pricing is another powerful tool in this suite, with large purchasers like Safeway and CalPERS leading the way.

Contracting and payment reform. Purchasers can also engage in alternate forms of contracting.  Direct contracting arrangements with providers enables employers to understand and manage provider pricing. Technology giant Intel is working directly with providers who are open to value-based contracting; Intel aspires to pay only for high-value care according to established metrics.  Another alternative is tiered or narrow networks, which differentiate higher-value providers and create incentives for consumers to select them.  Purchasers can also pursue new and better ways to pay for care, including broader and more comprehensive payment structures like global budgets and advanced medical homes, which place more accountability on health care providers for better quality and lower cost.

The role of the states. State leaders have a role to play as well. Several states, including Massachusetts and Rhode Island, are experimenting with new ways of exercising oversight of health plans and their contractual arrangements with providers. State Insurance Commissioners can also review insurer payment arrangements with providers to identify and prohibit excessive levels of price discrimination. Rate regulation is another approach. Robert Murray, one of the author’s of this post as well as CPR’s report, led successful efforts to regulate hospital rates in Maryland. Finally, state-run insurance exchanges have the opportunity to become active purchasers and adopt the aforementioned practices.

We need to evaluate whatever activities ensue. The Center for Medicare and Medicaid Services and its Center for Medicare and Medicaid Innovation have an opportunity to work across the entire market and take stock of everything that has been tried to date, identify the successful interventions, and re-focus their attention to these strategies.

Finally, CPR is beginning to examine how the nation can monitor and report on market consolidation and resulting price distortions by calling attention to trends like “all or none” contracting requirements, identifying hot spots where prices are dramatically increasing, and amassing more evidence about the impact of provider consolidation on quality.  These efforts can help educate stakeholders, mobilize support for any needed legislative and regulatory solutions, and help alert regulatory agencies to harmful trends.

Provider consolidation is shaping our health care system in profound ways.  Addressing its impact in reform strategies is critical.  CPR will be examining the best solutions we have at our disposal during its National Summit on Provider Market Power in Washington, DC, on June 11, 2013.