The consolidation of hospitals looms large in the public debate about the future of the U.S. health delivery system. The Biden administration has pledged a full review to determine if the benefits outweigh negative consequences.
The relevant facts are these:
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Last year, hospital spending in the U.S. reached $1.2 trillion–31% of total health spending in the U.S. and is forecast to increase 5.7% per year through 2027.
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Direct out of pocket payments by consumers represented 3% of hospital receipts last year.
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Prices for hospital services increased 29% from 2005 to 2018.
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From 2016-2017, outpatient volume increased 1.2%/yr. while hospital outpatient revenue increased 5.7% per year.
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Since 2010, about 100 hospitals were acquired/merged annually: only 20% of hospital acquisition targets is a financially distressed hospital. After acquisition, analysts have observed 15-30% cost reductions and 6-19% higher prices compared to pre-acquisition.
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Between 2012 and 2018, revenues for the 10 largest systems. that control 24% of total patient care revenues in the country increased 82% vs.45% for the rest.
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Inpatient visits are forecast to decline 2% between 2018 and 2027, while outpatient visits (at all sites, not just hospitals) will increase 15%.
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Applying the Herfindahl-Hirschman Index (HHI) used by the Department of Justice to evaluate market competitiveness, Health Cost Institute analysts conclude that 72% of all U.S. hospital markets are “highly concentrated”.
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Spending for hospital care and prescription drugs account for 61% of annual health cost increases last year. Hospital spending is forecast to increase 6.2% this year.
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Among 246 acquired hospitals and 1986 control hospitals, being acquired was associated with a moderate decline in quality: (patient experience scores, 30-day readmissions, mortality rates)
The data above are familiar to the industry’s external stakeholders: large employers, health insurers, lawmakers and private investors. Hospital consolidation contributes to escalating health costs. A remedy offered in the current issue of the Journal of the American Medical Association (JAMA) by Kocher, Shah and Navathe is two-fold: 1: Re-drawing of hospital referral regions (HRRs) based on patient mobility, access and clinical utilization analyses, and 2: Requiring Market Dominant Hospitals(MDH) with more than 50% market share to accept all forms of public insurance and invest a fixed percentage of their total revenue into health care provisions for low-income or marginalized communities. If the hospital operates as a not-for-profit, it would be required to pay 5% of its tax exemption benefit into a MDH redistribution fund (MRF) to be appropriated for public benefit.
They conclude: “COVID-19 has the potential to exacerbate the nation’s history of hospital consolidation. Stronger incentives to counteract consolidation could protect patients against potential adverse effects of anticompetitive hospital networks. Policy makers and regulators should consider legislation that defines and regulates MDHs, while promoting asset redistribution via an MRF, as a potential safeguard to the adverse consequences of the consolidation trend.”
MY TAKE
Hospital consolidation contributes to higher health costs: that’s proven. The rationale for most deals is the long-term sustainability of an organization primarily focused in two areas: leverage and latitude.
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Leverage to negotiate with health insurers and payers more effectively to avoid becoming commodities.
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Latitude to invest in new services, programs and capabilities that diversify offerings and align their organizations to future demand.
Leverage and latitude are defensible business strategies, but this case has not been effectively made by hospitals to key external stakeholders. Employers, health insurers, and policymakers think hospital consolidation is harmful. Investors see growing concern about hospital cost inflation as an opportunity. And hospitals are sending mixed signals to stakeholders: on the one hand victimized by disruptive competitors, paralyzed by over-regulation and impaired by the pandemic and on the other investments in for-profit ventures and strategic acquisitions.
The discussion about hospital consolidation is just starting. It will likely lead to a bigger discussion about the future for hospitals and expose vast intramural differences in how key organizations in the acute sector operate. The Kocher, Shah, Navathe proposal deserves consideration as part of this larger discussion: there’s little doubt the definition of hospital markets needs modernization and monopolistic hospital practices constrained.
But external stakeholders see other alternatives. A new study by RAND concluded savings from price setting on hospitals would be considerably more impactful on hospital costs than price transparency and limits on hospital consolidation. Comparing three options using hospital spending data for 2018, RAND calculates that:
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Option One- Price setting: Setting prices for all commercial payers could reduce hospital spending by $61.9 billion to $236.6 billion when the rates are 100 to 150% of Medicare rates (up to a 19% decrease in hospital spending)
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Option Two- Price transparency: Increased price transparency potentially reduces hospital spending by $8.7 billion to $26.6 billion (up to a 3% decrease in hospital spending)
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Option Three- Decreasing hospital market concentration: would reduce hospital spending by $6.2 billion to $68.9 billion (up to a 6%decrease in hospital spending).
In the interim, the Biden administration is likely to advance its agenda around hospital consolidation through administrative actions and executive orders from the Department of Health and Human Services and potential legal challenges through the Departments of Justice and the Federal Trade Commission. The likelihood of legislation to limit consolidation is unlikely with a 50-50 Senate and the stimulus package and pandemic at the top of Congressional minds. It’s likely all three options above will be on the table though the rule-making process will be quite protracted.
Meanwhile, employers and insurers will transfer their hospital cost increases to their employees and enrollees. Private investors will take advantage of regulations that allow sustainable profitability from consolidation. Hospitals will push hard against price controls and consolidate where they can.
Hospital consolidation will get more attention from external stakeholders but it’s unlikely to stop there. There’s widespread recognition it contributes to higher costs: what’s not resolved is what to do about it.
Paul
P.S. Please join me and industry veteran Angela Humphreys of Bass, Berry & Sims TOMORROW, February 23rd, 12pm ct as we sit down for a fireside chat to discuss the anticipated healthcare policy changes under the Biden Administration and what impact these will have on the industry. The discussion will cover various executive orders from Biden’s first 30 days and what is expected to transpire in what remains of his first 100 days in office. Hope to see you there!
RESOURCES
Bob Kocher, Soleil Shah, Amol Navathe “Overcoming the Market Dominance of Hospitals”; February 19, 2021; JAMA Network
“The potential for rapid consolidation of health systems”; December 10,2020; Deloitte
“Hospital Markets and the Effects of Consolidation”; October 8, 2019; American Action Forum
Cooper et al “Hospital Prices Grew Substantially Faster Than Physician Prices for Hospital-Based Care In 2007–14”; February 2019; Health Affairs
Beaulieu ND, Dafny LS, Landon BE, Dalton JB, Kuye I, McWilliams JM. “Changes in Quality of Care After Hospital Mergers and Acquisitions”; January 2, 2020; NEJM
Schwartz K, Lopez E, Rae M, Neuman T. , “What We Know about Provider Consolidation” September 2, 2020; KFF
Kocher B, Emanuel EJ. “Overcoming the Market Dominance of Hospitals”; February 19, 2021; JAMA Network
Liu et al “Impact of Policy Options for Reducing Hospital Prices Paid by Private Health Plans”; February 18, 2021; RAND
“Hospital Consolidation” NIHCM Foundation
Casey Ross “Backed by Big Hospitals, a Former Microsoft Executive Wades into the Messy Business of Selling Patient Data”; February 17, 2021; STAT News
CORONAVIRUS NEWS
Biden Sets Goal of 3 million Vaccinations/day by April
At the CNN townhall in Milwaukee Tuesday, President Biden said 600 million doses would be available by July and its vaccination/per day target is 3 million/day by April, up from 1.7 million/day currently.
February 16,2021; CNN
Altarum Analysis: Personal Spending 2% Lower in ’19 than Forecast, Covid-Related
Altarum analysts examined the US Bureau of Economic Analysis’ estimate of December Personal Income and Outlays released last month. Key findings:
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National health spending in 2020 was 2.0% lower than in 2019, a decline of about $75.8 billion dollars.
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Among the major contributors to the decline were hospital care which was 7.0% lower in 2020 than in 2019, and dental services, which dropped 20.2% in 2020; spending on prescription drugs and home health care actually increased for the year, the latter likely related to individuals selecting home care rather than nursing homes to avoid exposure.
Note: Altarum’s analysis is based on personal consumption expenditures and does not include services provided in non-traditional settings such as schools and workplaces, and categories that are not part of personal health care, including public health, research, investment in structures and equipment, and the net cost of private insurance which together constitute 20.6% of national health expenditures in 2019.
“Did National Health Spending in 2020 Decline for the First Year in Recorded History?”; February 17, 2021; Altarum
Special Report: Advertising on COVID-19 Misinformation during “Infodemic”
The World Health Organization termed an “Infodemic,” hundreds of myths about the virus. Between February 2020 and February 2021, NewsGuard analyzed advertising by 4,315 brands that ran 42,000 unique ads. Findings:
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A wide range of brands from across every major industry ran advertisements on COVID-19 misinformation websites, with 2,346 of the 4,315 brands advertising on more than one such site.
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Notable disinformation sources: TheGateWayPundit.com, which has claimed that Dr. Anthony Fauci stands to “make billions” from a COVID-19 vaccine and that face masks are dangerous; IntelliHub.com, which claimed that that the vaccine will alter patients’ DNA; NOQReport.com, which claimed that the pandemic was planned by Bill Gates and other billionaires, EnergyTherapy.Biz that.5G technology was the cause of the pandemic and theepochtimes.com, which claimed that the virus was manufactured by humans
“Special Report: Advertising on COVID-19 Misinformation”; February 17, 2021; NewsGuard
Vaccine Profits, Exec Comp Draw Attention to Drug Manufacturers
Vaccines and therapeutics for Covid-19 have been an unexpected windfall for the drug industry: Pfizer PFE 0.58% said earlier this month that it expects to book $15 billion in sales from its Covid-19 vaccine in 2021. Gilead Sciences GILD 0.46% announced that it expects to sell between $2 billion and $3 billion of its antiviral drug remdesivir in 2021. It booked $2.8 billion in sales of the drug in 2020, most of it in the fourth quarter. But Pfizer and Gilead are down about 20% from their pandemic-era highs. Pfizer trades at about 11 times this year’s adjusted earnings guidance, while Gilead fetches around 9 times.
Related: executives and directors at Pfizer Inc., PFE 0.58% Moderna Inc. MRNA -0.99% and other companies developing Covid-19 vaccines sold approximately $496 million of stock (8.5 million shares) last year vs. $132 million (4.5 million shares) in 2019.Per stock transaction research firm Kaleidoscope, Moderna, maker of one of two Covid-19 vaccines authorized for use from Operation Warp Speed sold more than $321 million of their stock in more than 700 transactions.
Charley Grant “Waiting for Big Pharma’s Coronavirus Profits to Impress Wall Street”; February 17,2021; Wall Street Journal
Inti Pacheo “Insiders at Covid-19 Vaccine Makers Sold Nearly $500 Million of Stock Last Year”; February 17, 2021; Wall Street Journal
CDC: 2020 Life Expectancy Decline due to Covid
Per the CDC’s National Center for Health Statistics, life expectancy at birth was 77.8 years at of the end of June– the largest one-year drop since World War II, when life expectancy fell 2.9 years between 1942 and 1943. It put life expectancy at its lowest level in the U.S. since 2006.Life expectancy for Black Americans decreased 2.7 years for the first half of 2020 to 72 years, and for Hispanics it fell 1.9 years to 79.9 years. Among non-Hispanic whites, it declined 0.8 year to 78 years.
Janet Adamy “U.S. Life Expectancy Fell in First Half of 2020 as Covid-19 Deaths Surged”; Feb. 18, 2021; Wall Street Journal
INDUSTRY NEWS
Biden Health Team Update
Update: HHS Secretary Xavier Becerra Confirmation Hearings Begin Tomorrow
Last week, President Biden announced his nominee to run the Centers for Medicare and Medicaid Services is Chiquita Brooks-LaSure. She previously served in the Obama administration helping implementation of the Affordable Care Act coverage reforms (the Center for Consumer Information and Insurance Oversight and the Office of Health Reform), as a staff member for the House Ways and Means Committee, and most recently as a managing director at Manatt Health, a healthcare consulting firm. From her writings, expansion of coverage for under-insured and disadvantaged populations, reducing health disparities, reducing surprise medical bills for patients are a likely focus of her efforts.
It is rumored former Senate Finance legislative Liz Fowler, JD, PhD, will be tapped to run the Center for Medicare and Medicaid Innovation under Brooks-LaSure. Fowler was Chief Health Counsel to Senate Finance Chairman Max Baucus when it passed its version of the ACA, and has previously worked with Johnson and Johnson and The Commonwealth Fund in key policy roles.
And, as predicted, Office of Management and Budget nominee Neera Tanden faces opposition in her confirmation: last week, centrist Democrat Joe Manchin (WV) indicated he would not vote for her confirmation suggesting it’s unlikely she’ll be confirmed.
Dan Diamond, Amy Goldstein “Biden picks another Obama veteran to oversee Medicare, Medicaid”; February 18, 2021; Washington Post
Michael Brady “Where nominated CMS administrator Brooks-LaSure stands on 4 key issues”; February 19, 2021; Modern Healthcare
CBO Analysis of Stimulus Package Changes to Coverage
Last Monday, the Congressional Budget Office (CBO) released its analysis of the COVID-19 relief proposals from the Ways and Means Committee and the Education and Labor Committee. The $54 billion over 10 years extending coverage to 2 million uninsured via 2 major programs:
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COBRA: Congress would temporarily subsidize COBRA coverage for 3 million eligible adults (85% of premiums paid through September). Cost $14.8-$16.3 billion/10 years.
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Subsidies: Premium tax credits for those above 400% of the federal poverty level (Cost: $35.5 billion/10 years).
Katie Keith “CBO Analyzes American Rescue Plan Coverage Expansions“; February 18, 2021; Health Affairs
CBO Analysis: Single Payer Costs and Coverage
Last week, the Congressional Budget Office (CBO) released 200-page economic analysis of single-payer health care reform, also known as Medicare for All. The CBO models five different variants of single payer: four envision universal coverage of all services other than long-term care, while the fifth incorporates a large expansion of long-term services and supports (LTSS) for people with disabilities of all ages. Its scenarios vary by patient cost sharing and provider payment level. Highlights:
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Under single payer models, total health spending would increase up to 4.4% above current levels.
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Administrative costs would be lower: The CBO projects that the share of revenues that hospitals spend on administration would fall from 19% at present to 12% under single payer; that physicians’ administrative overhead would fall from 15% to 9%; and that the administrative expenses of other medical providers (for example, dentists, home health agencies, and hospices) would fall from 9% to 6%. In addition, it estimates that physicians and nurses would spend less time on administrative activities, freeing up 4.8% of physicians’ work hours and 18.4 %of nurses’ work time.
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Payments to clinicians would rise in all five scenarios according to CBO estimates. We estimate this translates into an additional $39,816–$157,412 in revenue per practicing physician.
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For hospitals, the CBO estimates that gross revenue would fall by $187 billion under the “low pay” scenario but rise by $144 billion under the high payment scenario.
Gaffney et al “Congressional Budget Office Scores Medicare-For-All: Universal Coverage For Less Spending”; February 16, 2021; Health Affairs
Wang et al “Supporting Acute Advance Care Planning with Precise, Timely Mortality Risk Predictions” NEJM Catalyst
Experts: Medicaid Reforms Needed
Background: Medicaid now covers more than 75 million US residents and is the largest single payer of health care in the nation. In 2019, of total Medicaid spending of $626 billion: 35.6% (ranging from 21%-47%) came from states (ranging from 21%-47%) accounting for 30% of state budgets (range: 14%-39%).
The authors argue that a Medicaid reforms need 5 essential elements: stability of funding and coverage; coordinated infrastructure; integration and alignment across publicly funded programs; alignment of health care and social dollars at the point of care; and a value-based approach to benefits. They also note that turnover in Medicaid leadership is high: average state Medicaid director tenure is approximately 19 months due to markedly lower pay, professional reputational risk, and lower resources for success than roles with commensurate responsibilities in the private sector.
Rebekah E. Gee, David Shulkin, Iyah Romm, “A Blueprint for Comprehensive Medicaid Reform”; February 16, 2021; JAMA Network
Low Value Care Significant Despite Education Efforts
Researchers analyzed utilization by 21 million Medicare fee for service enrollees for receiving 32 low-value services (no net benefit in specific clinical scenarios) between 2014and2018 Findings:
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In 2014, 36.3% of study participants received low-value care, while 33.6% received low-value care in 2018.
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Low-value care use and spending decreased marginally from 2014 to 2018.
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Three services comprised approximately two-thirds of uses among 32 low-value services per 1000 individuals: preoperative laboratory testing, opioids for back pain and antibiotics for upper respiratory infections.
Mafi et al “Trends in Low-Value Health Service Use and Spending in the US Medicare Fee-for-Service Program, 2014-2018”; February 16, 2021; JAMA Network
