Increased consolidation of health plans could benefit consumers by helping to drive hospital costs lower, according to a new study by RAND Corp reported on by Healthcare Payer News.
Rand researchers found that hospital costs in metropolitan areas with the fewest health plans were approximately 12 percent lower, a finding the study authors contend shows that bigger health plans can more effectively negotiate lower prices from healthcare providers.
“There may be a benefit for consumers when health insurance plans are more consolidated because it tends to drive down hospital costs,” said Glenn A. Melnick, an economist at RAND, in a press release. Melnick is also the Blue Cross of California Chair in Health Care Finance at the USC School of Policy, Planning and Development. “As long as there is enough competition to keep health plans honest, the consolidation has a good result on prices.”
The findings run counter to what many hospital operators have contended in the past: namely increased consolidation among health plans would provide them with too much power in the marketplace and that in their attempts to suppress the cost of healthcare in those markets, insurers might also be harming the overall quality of care.
Generally economic theory is based on the concept that decreased competition leads to increased prices. The Rand researchers in this case found the opposite in their review of health plan industry consolidations and their impact on hospital charges in the early 2000's.
Specifically, the RAND researchers used data from 2001 to 2004 about health plans, hospitals and healthcare costs in metropolitan areas across the country to determine market concentration among both health plans and hospitals. Using this information, researchers created models to examine the impact health plan consolidation had on hospital costs. It did not examine fees charged by health plans.
Most importantly, the results showed that most hospitals operate in markets where health plans are not very consolidated and that only 7 markets showed a high level of consolidation and that in nearly 90 percent of the metro markets the level of consolidation among hospitals exceeded the level of health plan consolidation.
What's on tap for Hospital Mergers
John Reiboldt, managing director of Coker Capital Advisors, indicated that many of the same market drivers that made 2010 a good year for hospital mergers will likely continue into 2011.
Reiboldt spoke at an education session titled “Acquisitions and Mergers in the Hospital Market.” He said many hospitals and health systems view the acquisition of – or mergers with – other facilities as a viable strategy for long-term growth. A merger or acquisition offers hospitals an opportunity to increase their market share, he noted.
“The M&A process should be one aspect of a hospital’s strategic plan,” Reiboldt said. “If you’re selling your hospital, don’t be afraid to create value. And buyers, don’t be afraid to spend the money to do the job right.”
Many stand-alone hospitals face great economic uncertainty, Reiboldt said, making a sale appealing to leadership. Add to that an increased regulatory burden, the threat of a return to managed care and challenges with physician employment, and an increasing number of hospitals are beginning to feel that a merger or acquisition makes good strategic sense.
Conclusion
The Rand study findings "suggest that if policymakers are interested in lowering costs, they should find a way to restore competition among hospitals, in addition to assuring competition among health plans,” Melnick said. “There has been great consolidation among hospitals and physician practices, and that consolidation has allowed hospitals and doctors to raise prices.”
Therefore Rand found that hospital consoildations leads to increased consumer costs and not increased health plan consolidations. This finding shows that health care costs are the true drivers of increased health care expenditures and not health plans.
Support for the study was provided by the Robert Wood Johnson Foundation’s Changes in Health Care Financing and Organization initiative.