Consolidation Curb-Stomps Rural Americans
A rebuttal to the AHA and its impacts for the patient and taxpayer
As the healthcare market grows more consolidated — from a growing share of hospitals falling under health system ownership to insurers’ corporate venture arms becoming the largest backers of growth-stage startups in healthcare — it’s no wonder that the most powerful actors of the healthcare lobby is arguing “actually, a concentrated market is good”.
Early last month, the US Senate Finance Committee had a hearing on Corporatization and Consolidation in Health Care. As one may expect, the big lobbyists and dominant players pointed fingers at each other while drowning out the concerns of small, independent operators and advocates.
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Despite parading policy which is undeniably harmful to Americans, the American Hospital Association (AHA)’s statement regarding the hearing offers great structure to explain how consolidation shreds competition, drives up healthcare costs, and kills Americans. The AHA also is an excellent proxy for the desires of Big Health — of around 6,100 hospitals, over 3,500 are in a health system. Only 1,800 of the total 6,100 figure are in rural America, and with membership fees determined by the number of hospital beds, it becomes clear that well-resourced and larger hospitals have a greater say in the policy position of the AHA.
What the AHA Says
The AHA, in defending consolidation of rural healthcare provider organizations, cites lower costs, better quality of care, and improved access to care in rural communities.
Acquisitions and mergers can help reduce health care costs and create a fiscally sustainable environment for health care delivery for patients and communities. Mergers with larger hospital systems can provide community hospitals the scale and resources needed to decrease costs by increasing administrative efficiencies and reducing redundant or duplicative services
The AHA seems to take advantage of Americans’ concerns about ballooning healthcare costs. Most hospital-related healthcare spending across the country comes from the cost of provider labor and equipment. Cutting the number of administrators by shifting a local hospital to a health system’s billing solution does nothing to substantially contribute to the supposed noble goal of reducing the country’s healthcare costs.
For situations when the hospital gets its provider labor and equipment spending reduced, it’s through the health system cutting services altogether, not making care delivery more efficient.
One study of recent rural hospital mergers found the percentage of facilities providing any maternal/neonatal care dropped 7.2% in two years after a merger. That study built on another analysis that documented a decrease in outpatient diagnostic, obstetric, and primary care. Considering rural hospitals are often the sole source of care in their communities, one must ask what the AHA means by “redundant” care.
Not only do these “reduced costs” leave communities with their needs unmet, but they also take away much-needed economic activity. When a hospital cuts services and staff, it is reducing the amount of money which flows back into local communities in the form of salaries. Further, when a hospital cuts services and has to send patients off to other health system locations, the economic impact of treating that patient suddenly leaves the community to be harvested by the health system.
Emerging research has demonstrated a clear association between consolidation and quality improvement.
The AHA cites research which indicates the introduction of best practices used at health systems can reduce complications during certain procedures while reducing mortality for conditions like pneumonia and stroke. However, such empirical evidence is not so consistent — one 2020 study indicated the opposite that mergers generally lead to a decline in mortality, higher readmission, and poorer patient satisfaction.
Even with potential increased quality, a JAMA article from earlier this year highlights that marginal improvements in quality measures between independent and health system providers are also accompanied with disproportionately higher costs.
The AHA goes on to argue that consolidation of rural hospitals can lead to the introduction of new specialty care. However, in reality, the introduction of a few specialty care providers is not enough to offset the impact of losing an intensive care unit, delivery ward, or surgical facilities. To access the true extent of services a health system can offer, rural patients must travel far to receive the new healthcare services they supposedly have access to as a result of merger and acquisition.
Even if such a consolidated system does not entirely cut services, it continues to move the care of patients out of local communities. Consider the challenge of rural bypass wherein patients are moved to receive care at urban hospitals when a rural hospital would have sufficed. A Centers for Medicare and Medicaid Services (CMS) report on bypass noted:
…specialty providers may be affiliated with larger health systems, and those providers will admit patients to the affiliated hospital. The purchase of a small rural hospital by a larger system drove patients to receive inpatient care at the larger hospital.
The purchase of these rural hospitals effectively drives us total cost of care by sending more patients to more expensive facilities further from home while also ensuring that the economic impact of treating a patient (clinical labor wages, overhead expenses, etc.) are extracted out of rural communities and into cities.
Price Discrimination and Bargaining
Most transactions in healthcare happen under the terms of negotiation between organizations. For a hospital, this means that everything from the price it pays for medical equipment from manufacturers to the insurance reimbursement rates for healthcare services. With these one-on-one agreements, there’s a lot of price discrimination at play — wherein a seller provides the same good or service at different prices depending on the willingness to pay of these different buyers.
Many factors can impact the buyer’s willingness to pay. The presence of alternative sellers can induce a downward pressure on prices in a market whereas information on what others are paying can introduce more uniform pricing across the board. Bargaining power also impacts negotiated prices — such as when the size of a hospital’s patient population means that the volume of their medical equipment purchasing can be leveraged to get lower unit prices from sellers.
This is also the underlying premise of the group purchasing organization (GPO), which is supposed to amalgamate demand across many buyers to get better pricing.
One of the implications of price discrimination is the idea of cross-subsidization. The lost potential profit of lower prices for a subset of customers is offset by another set of customers paying more. When one party wins favorable terms, it’s likely someone else is paying the price of that. Then there are the impacts of the access to talent and other resources — those organizations with deeper pockets will have the ability to reach, employ, and leverage people better skilled at negotiating and having institutional knowledge crucial to effective bargaining.
In the relatively simple case of equipment purchasing, increased consolidation of healthcare providers means fewer firms competing for the same goods that allows sellers to raise prices. Even if some independent providers amalgamate their demand for greater bargaining power with sellers, one economic model of consolidated markets found that only those above the 70th percentile of provider groups with bargaining power can ensure savings from bargaining collectively. The cheaper prices that the most powerful players in such a market are effectively subsidized by the smaller groups in the same market.
The imbalance of bargaining power impacts independent providers more seriously with setting reimbursement rates with payers. When providers get consolidated under a singular health system, the reimbursement rates for the services of those providers can be renegotiated. These consolidated providers, as one of few options for healthcare services, can demand higher reimbursements from payers who themselves have to maintain some minimum amount of covered providers for a geography. When the tradeoff becomes pay higher rates to a health system or not be allowed to sell health insurance in a region, it becomes clear why payers eat the higher cost of care or leave rural communities.
Of course, these higher demanded rates are cross-subsidized by local independent providers. Payers, seeking to reduce the amount they spend on covering care, set lower reimbursement rates for independent providers. These independent providers do not have the volume or associated bargaining power to negotiate better payments.
It is a demonstrated phenomenon — one which Chris Thomas, CEO of Community Hospital in Grand Junction, CO, voiced concerns about during the Senate Finance Committee’s hearing.
“In our region, a larger health system acquired the largest hospital and is now bringing their health insurance products into our market,” Thomas said. “If they are successful at growing the number of lives covered by their health insurance products, we fear they will block access to our hospitals through tier products, driving more covered lives into their hospital.”
“I’m not implying the system hospitals do not care for their communities,” Thomas said. “What I’m simply saying is that we have one priority as a community hospital and that’s the patients in Grand Junction, Colorado. One of the main reasons that I’m so committed to our organization and our mission is that our board of directors has not once asked me to make more money.”
As part of a larger health system with established and higher-paying private payer contracts, rural hospitals swallowed by health systems can offset losses covering a larger Medicare/Medicaid mix of patients. In a market-distorting effect, these consolidated hospitals can operate at a margin where local/independent hospitals must continue to claw its way to sustainability off a structurally poorer patient population with public payers that often do not reimburse enough for break-even.
The entry and expansion of consolidated health systems into rural communities creates a vicious cycle that makes independent delivery of healthcare services financially unsustainable. In the name of efficiency, as independent providers get absorbed or close down, these consolidated systems reduce staff counts, hours, and total care delivered without concern for how to maintain access to care and how to retain healthcare-related economic value for the local community.
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