Potential Advantages of Health System Consolidation and Integration

A recent editorial in the Wall Street Journal1 decried hospital mergers, citing concerns that consolidation results in higher prices and less choice for patients. While Makary, the editorialist and a surgeon, agrees that quality initiatives might be facilitated through consolidation, he cites several recent court cases wherein concerns about monopolistic pricing behavior prevented or modified the terms of several hospital consolidation efforts. Makary worries that, in addition to raising the price of care, hospital consolidations might restrict patient choice of both service providers and treatments available. Patients might not be made aware of different quality, cost, or treatment options available in the marketplace.

We contend that, if executed well, integration of care (not simply consolidation) can have positive quality and cost effects, and contribute to achieving the Institute for Healthcare Improvement’s Triple Aim of better care, better heath, and lower costs.

Very expensive technology, the employment of a highly educated workforce, and regulatory expenses conspire to make health care an industry with extremely high fixed costs.2 That hospital labor is very expensive and is increasingly fixed–salaries for employed physicians, hospitalists, nurses, and other providers do not vary much with production–makes it critical to efficiently use those fixed-cost assets. And because health care delivery systems sell goods that are not fungible and have no shelf life–bed days of care for hospitals and time for office visits for physician groups–the only way to maximally use their fixed-cost assets is immediately. Unsold bed days of care or open spots in a provider’s schedule simply spread fixed costs across fewer units and drive up unit health care costs.3

Because of this high fixed-cost structure, the most efficient way to operate hospitals or physician practices is to keep them full, with paying patients. Integrating health care delivery systems can help achieve such efficiencies, and integration can occur in numerous ways, some of which include consolidation. Unfortunately, antitrust considerations require structural integration to allow health care delivery systems to do joint strategic planning and to move funds across components to support population health strategies. And co-operative population health decisions require structural integration; for instance, efforts to improve patient outcomes by maintaining sufficient surgical volumes and provider experience with existing as well as new technologies requires a level of care coordination that demands structural integration.

While Makary points out that consolidation and integration can lead to narrower pharmaceutical and device formularies, limited supply chains can reduce costs while enhancing care outcomes. A common example is standardizing on a single hip replacement device, improving quality and decreasing costs. Although Makary is concerned that consolidation may reduce advantages that patient choice might engender, this is unlikely if pharmaceuticals or devices are selected based on evidence, and such choices are monitored across and within the integrated system. Such choices should be limited to equally effective treatment alternatives: for instance, in Europe, literature-based pharmaceutical and device decision-making is used frequently not simply to limit choice, but to maximize cost-effectiveness.

So if hospital and health system integration can improve quality and reduce costs of care, Makary’s concern seems to be whether such systems will pass on savings to consumers. Consumers experience health care costs largely through copayments for care received and payment of insurance premiums; insurers set insurance premiums by anticipating volumes of care provision and negotiating with health care delivery systems on the prices for providing those service volumes. There are 2 ways to reduce consumer health care costs: reduce volumes of care or reduce unit prices of care. Both are important.

Unnecessary utilization–driven by supplier-induced demand4–increases costs of care. Informed choice and shared decision-making, wherein patients are given information that allows them to get only the care they want and need, often leads to lower utilization, lower cost, and better outcomes.5 Makary is concerned that patients will not know what their health care options are in integrated systems, but there is evidence that patients do not know their options now. Evidence of this includes the widespread geographic variation in how much preference sensitive care–care wherein there are multiple treatment options, the best one of which should be determined by patients’ desires and values–is seen in the US.

For instance, in 2012, total age-, sex-, and race-adjusted medical discharges in 306 US hospitals referral regions varied threefold from 111.6 to 329.4; total knee replacement rates varied fourfold, from 3.8 to 15.4 per 1000 Medicare fee-for-service beneficiaries; back surgery rates varied fivefold, from 1.7 to 10.0; and mastectomy rates varied sevenfold, from 0.19 to 1.38.6 Research indicates that higher rates are not due to differences in population health care status or needs; rather, greater supplies of hospital beds and surgeons appear to be related to higher rates of service utilization.7 Reinforcing physician autonomy would not solve the issue, as Makary seems to suggest: to the extent that decisions are influenced by physician habit and preference, standardizing care would benefit patients. Further, ensuring that shared decision-making processes that inform patients about treatment options are deployed into those care pathways may further reduce health care costs, as patients who understand their options tend to choose more conservative care options and reduce care volumes.8

Driving down unit prices of care is a bit trickier. In the current fee-for-service environment, health care providers are incentivized to do more, regardless of the impact on health outcomes; in the short run, health care delivery cost reductions might simply transfer profits from health care providers to insurers. We note, however, that health care delivery systems’ overall profit margins are in the −5% to 5% range, in stark contrast to many other segments of the health care system, such as pharmaceutical (profit margins running about 20%) or device (about 40%) manufacturers. But more health care systems are entering risk-based contracts, where they benefit financially from improvements in care delivery efficiencies by sharing savings with insurers. However, care capitation, wherein a defined set of health care services are provided to a defined population for a set dollar amount per month, aligns the interests of health care delivery systems, insurers, and patients. Health care delivery systems keep all cost savings generated by cost savings efforts and are disincentivized from over-providing care; insurers know what their payout will be; and patients will benefit from cost savings and lower exposure to unwanted and unneeded care.

It is right to be concerned about monopoly powers and their potential impact on prices. But policymakers should also consider the benefits that consolidation and integration may produce. We have too much hospital capacity in the US today: if capacity is not constrained, the higher volumes needed to fill empty existing beds in order to maximally use expensive fixed assets might offset any cost savings associated with bundled payments or any other noncapitated payment reforms.3 From a total cost perspective, somewhat higher unit hospitalization prices resulting from more market power might be desirable, as long as system integration removes capacity and, in conjunction with establishment of shared decision-making processes, results in lower per capita hospitalization rates and total costs.

To read this article in its entirety and to view additional images please visit our website.

– William B. Weeks, MD, PhD, MBA, Robert A. Greene, MD, MHCDS, James N. Weinstein, DO, MS

This article originally appeared in the October 2015 issue of The American Journal of Medicine.