1. Effects of Provider Consolidation in Healthcare: The Latest Research Seth Freedman Assistant Professor, IU SPEA November 21, 2014

2. Recent Trends in Consolidation New wave of hospital mergers −50-60 per year during 2000s −90-100 per year since 2011 ~15% increase in # of hospitals in systems since 2002 Increasing prevalence of hospital owned physician practices July 2, 2015Seth Freedman, IU SPEA

3. July 2, 2015Seth Freedman, IU SPEA Outline Recent trends in consolidation Conceptual effects of consolidation Empirical evidence of effects Some implications moving forward

4. Effects of Consolidation on: 1.Provider Costs 2.Price 3.Quality 4.“Medical Arms Race” July 2, 2015Seth Freedman, IU SPEA

5. Varying Types of Consolidation Mergers Merging ownership only Merging operations System acquisitions Systems with local presence National systems with no local presence Physician Integration Physicians joining large group practices Hospital/hospital systems purchasing physician practices July 2, 2015Seth Freedman, IU SPEA

6. Focus of Today’s Talk Hospital market competition and mergers −Most well developed research area Two main types of studies −Comparing more and less competitive markets −Before and after studies of mergers July 2, 2015Seth Freedman, IU SPEA

7. Focus of Today’s Talk Will mention some early work on −System acquisitions −Hospital/physician integration July 2, 2015Seth Freedman, IU SPEA Important areas for future research

8. RECENT TRENDS IN PROVIDER CONSOLIDATION July 2, 2015Seth Freedman, IU SPEA

9. Chart 2.9: Announced Hospital Mergers and Acquisitions, 1998 – 2013 Source: Irving Levin Associates, Inc., The Health Care Acquisition Report, Twentieth Edition, 2014. (1) In 2006, the privatization of HCA, Inc. affected 176 acute-care hospitals. The acquisition was the largest health care transaction ever announced. (1)

10. Chart 2.4: Number of Hospitals in Health Systems, (1) 2002 – 2012 Source: Avalere Health analysis of American Hospital Association Annual Survey data, 2012, for community hospitals. (1) Hospitals that are part of a corporate body that may own and/or manage health provider facilities or health-related subsidiaries, as well as non-health-related facilities including freestanding and/or subsidiary corporations.

11. July 2, 2015Seth Freedman, IU SPEA medec.com/medicinemonopoly

12. CONCEPTUAL EFFECTS OF CONSOLIDATION July 2, 2015Seth Freedman, IU SPEA

13. Conceptual Effects Typical antitrust concerns: lack of competition increases prices The health care sector is different! July 2, 2015Seth Freedman, IU SPEA PatientsProvidersInsurers

14. Consolidation and Cost Economies of scale Facilitate investment in EMRs Improved access to capital Eliminating duplicative services or excess capacity Effects likely to depend on extent to which merging hospitals combine facilities or not July 2, 2015Seth Freedman, IU SPEA

15. Consolidation and Prices Insurer Bargaining Power Provider Bargaining Power July 2, 2015Seth Freedman, IU SPEA

16. Consolidation and Prices Increased provider bargaining power Increased prices paid by insurers to providers Increased premiums, lower benefits, and/or lower wages for consumers July 2, 2015Seth Freedman, IU SPEA

17. Consolidation and Quality Gov. Determined Prices (e.g. Medicare) Can’t compete for patients through prices Level of competition likely to raise quality Market Determined Prices (e.g. Private Insurance) Can compete for patients through prices or quality Quality effects ambiguous July 2, 2015Seth Freedman, IU SPEA

18. Adding MCOs Compete by enhancing attractiveness to MCO Lower treatment costs More competition quality Attract more patients More competition quality July 2, 2015Seth Freedman, IU SPEA

19. Medical Arms Race True clinical “quality” is difficult for patients to observe Hospitals may compete by investing in flashy things that attract patients, but may not improve care −Amenities −Medical technology with little or uncertain benefit July 2, 2015Seth Freedman, IU SPEA

20. EMPIRICAL EVIDENCE July 2, 2015Seth Freedman, IU SPEA

21. Challenges to empirical research Lag time to obtaining data Defining markets −Arbitrary geographic classifications −Patient flows Measuring actual transaction prices Hospitals sell many “products” Correlation vs. causation July 2, 2015Seth Freedman, IU SPEA

22. Correlation vs. Causation July 2, 2015Seth Freedman, IU SPEA

23. Provider Costs Some evidence of general economies of scale in hospitals Few direct studies of consolidation on costs July 2, 2015Seth Freedman, IU SPEA

24. Provider Costs One high-quality, direct study: Dranove and Lindrooth (2003) −Studied 122 mergers between 1989 and 1996 81 of these mergers combine licenses −Find 14% cost savings in license- combining mergers −No savings in others July 2, 2015Seth Freedman, IU SPEA

25. Prices One of the most well developed areas of research Consistent evidence that level of market concentration raises prices −Much early evidence from CA −Newer work examines FL, MA, and full US −Must studies based on data through mid-2000s July 2, 2015Seth Freedman, IU SPEA

26. Prices July 2, 2015Seth Freedman, IU SPEA

27. Prices Consistent evidence that mergers raise prices Variety of methods to ensure appropriate “control” hospitals July 2, 2015Seth Freedman, IU SPEA

28. Prices Example: Dafny (2009) Do hospitals raise prices when rivals merge? Leverages “co-located” rivals July 2, 2015Seth Freedman, IU SPEA

29. Prices Example: Dafny (2009) Find that mergers lead to 40% higher prices National coverage Most “event studies” find effects upwards of 20%, especially when markets are already relatively concentrated July 2, 2015Seth Freedman, IU SPEA

30. Quality Large literature on effects of competition on quality under both pricing schemes Administered pricing −Older studies on Medicare find competition improves quality −Newer studies of GB policy change find consistent results Market-based pricing −Results mixed, but lean towards quality improving with more competition July 2, 2015Seth Freedman, IU SPEA

31. Quality Much of this literature based on mortality outcomes Especially AMI patients May be incomplete picture of overall “quality” July 2, 2015Seth Freedman, IU SPEA

32. Medical Arms Race Little direct research on the MAR hypothesis Some indirect evidence from pre-1991 −Kessler & McLellan (2000): “Is Hospital Competition Socially Wasteful?” −Competition increased costs without clear impacts on health outcomes for elderly heart disease patients −After 1991, competition unambiguously beneficial July 2, 2015Seth Freedman, IU SPEA

33. Medical Arms Race “the medical arms race is slowed by insurers with market power in markets with sufficient competition among hospitals. As hospitals continue to consolidate and integrate with other providers (e.g., as encouraged by the ACO movement), I wonder if the medical arms race will return.” ~Austin Frakt, http://theincidentaleconomist.com/wordpress/th e-medical-arms-race/ http://theincidentaleconomist.com/wordpress/th e-medical-arms-race/ July 2, 2015Seth Freedman, IU SPEA

34. Medical Arms Race Some evidence patients value “amenities” Goldman & Romley (2008): “Hospitals as Hotels” −Medicare pneumonia patients in LA value amenities −Patients actually more responsive to amenities than clinical quality in choosing hospital Need more direct evidence on competition and tech/amenities investment July 2, 2015Seth Freedman, IU SPEA

35. Physician Integration Major data limitations Researchers currently working on competition in physician markets −Preliminary evidence: consolidation of physician offices raises prices Also evidence that physician/hospital integration raises prices Need to know more about quality outcomes! July 2, 2015Seth Freedman, IU SPEA

36. Effect Of Hospital Integration And Market Competitiveness On Hospital Prices. Baker L C et al. Health Aff 2014;33:756-763 ©2014 by Project HOPE - The People-to-People Health Foundation, Inc.

37. Hospital Systems Hospitals in multi-hospital systems increased prices more between 1999 and 2003 (Melnick & Keller 2007) −34% more for large systems −17% more for small systems −Results not confined to hospitals with other system members in local market −Suggestive of important bargaining power July 2, 2015Seth Freedman, IU SPEA

38. Hospital Systems & Physician Integration Know very little about other potential effects −Efficiency −Financial stability −Care coordination −Quality July 2, 2015Seth Freedman, IU SPEA

39. Summary of Research Findings: Effects of consolidation July 2, 2015Seth Freedman, IU SPEA Costs Potential for cost savings Especially when services consolidated Prices Generally price increases Mergers in concentrated markets increase prices by >20% Quality Generally quality decreases Results more mixed when prices market determined MAR Indirect evidence of MAR when insurers were weaker Could become important again

40. Implications Moving Forward Much of our knowledge based on 1990s merger wave Will consolidation continue to accelerate? Will current mergers and acquisitions have similar or different effects? July 2, 2015Seth Freedman, IU SPEA

41. ACOs, Physician Integration, and Multi-Hospital Systems New models of care delivery becoming increasingly important Clear scope for price effects How will this be balanced with potential benefits? How will regulators respond? Balancing act between FTC and ACA July 2, 2015Seth Freedman, IU SPEA