Healthcare M&A Leads to 90% of Markets Being Highly Consolidated

August 08, 2018 - The recent uptick in healthcare merger and acquisition (M&A) activity is leading to significant market consolidation, particularly among providers organizations, a recent Commonwealth Fund analysis revealed.

The majority of metropolitan statistical areas (MSAs) analyzed by health economics experts from the University of California, Berkeley, School of Public Health were significantly concentrated. About 47 percent of the MSAs were considered highly concentrated, while 43 percent were super concentrated.

Just 9.6 percent of MSAs fell into the middle category and 0.3 percent were unconcentrated.

Provider consolidation was so significant that the researchers created the term super concentrated. According to the Herfindahl-Hirschman Index (HHI), which is used by the Antitrust Division of the Department of Justice and Federal Trade Commission to determine market concentration, highly concentrated areas have an HHI score of over 2,500 points.

Because so many provider MSAs fell into the highly concentrated range, the researchers established the super concentrated category. Areas with HHI scores above 5,000 points are considered super concentrated.

READ MORE: How Hospital Merger and Acquisition Activity is Changing Healthcare

In comparison, mergers and acquisitions activity among payers was strong but payer consolidation paled in comparison to the concentration of provider organizations in most MSAs.

For insurers, almost all the MSAs studied were either highly concentrated (54.5 percent) or moderately concentrated (36.9 percent). Just 5 percent of MSAs fell into the super concentrated category for payers.

Provider consolidation was significantly higher relative to insurer consolidation in 58.4 percent of metropolitan statistical areas (MSAs), researchers reported. Payer consolidation only exceeded that of providers in 5.8 percent of MSAs analyzed.

The trend toward highly, and even super, concentrated healthcare markets spells trouble for the industry, the researchers explained.

“Over the past several decades in the United States, more and more health care providers and health insurers have consolidated, increasing their market power,” they wrote in the Commonwealth Fund blog post where they published their results.

READ MORE: Value-Based Care Spurs Higher Physician Consolidation Rates

“Highly concentrated markets have contributed to the growth in US health care spending because they are associated with higher health care prices and insurance premiums, yet are not typically associated with higher quality of care,” they continued.

Hospital prices in monopoly markets were more than 15 percent higher than prices in areas with four or competitors, the Federal Trade Commission reported in 2016. Hospitals with just one or two competitors also charged between five and six percent more than hospitals with more than four rivals.

Healthcare costs go up as markets become more concentrated because providers gain additional market power. That market power translates to greater bargaining power with insurers, which means providers can negotiate higher claim reimbursement rates.

“Over the years, the market power of hospitals has resulted in limited pressure to constrain costs, resulting in an average cost structure across the United States that is higher than in similar countries (even after accounting for the general cost of living), and in commercial payer rates that exceed even this high cost structure by 50 percent,” the Medicare Payment Advisory Commission (MedPAC) explained.

The increase in payer consolidation could combat the monopoly power of large provider organizations in a region. But previous research from the health economics experts at the University of California revealed that isn’t the case.

READ MORE: How to Improve Healthcare Mergers and Acquisitions Strategies

Payers have increased bargaining power in markets with both high provider and insurer concentration levels. That boost in bargaining power resulted in reduced hospital admission prices by five percent, cardiologist visit prices by four percent, radiologist visit prices by seven percent, and hematologist/oncologist visit prices by 19 percent.

However, consumers and employers did not reap the benefits of the lower costs.

“While insurers are able to capture a share of the monopoly prices that highly concentrated providers receive, there is no market mechanism to ensure that insurers pass these reduced prices on to consumers through lower premiums,” researchers wrote. “Significant premium increases, coupled with healthy profits in the health insurance industry, indicate that consumers are receiving little of the benefit from insurer bargaining power.”

With provider and payer consolidation on the rise, the researchers called for greater state and federal scrutiny of healthcare mergers and acquisitions.

“To protect consumers and employers from high prices and premiums, state-level regulatory scrutiny — coupled with federal regulatory scrutiny — of potentially anticompetitive behavior is needed,” they wrote in the blog post. “State officials better understand the nuances of their local markets and are able to ascertain what steps, if any, may be required.”

State and federal officials should use their MSA’s concentration level to assess healthcare mergers and acquisitions. Determining the difficulty of entering a market and the potential economies of scale from a healthcare deal are also key.

“For example, as health care diagnoses and treatments become more complex, larger, more-integrated, and well-capitalized health care providers may be better equipped to lower costs and improve quality,” the researchers stated.

“Still, it is important for regulators to increase the likelihood that the benefits of consolidation ultimately flow to consumers and employers,” they concluded.