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The Keckley Report

Time for New Paradigm in Hospital Consolidation Debate

By August 23, 2021March 1st, 2023No Comments

In the current issue of Health Affairs, MedPAC chairman and Harvard Med School policy guru Michael Chernow and colleagues took on the wonky concept that lower payments by Medicare and Medicaid to hospitals result in cost-shifting to commercial payers who pay more. It’s particularly relevant to the industry’s intensifying debate about hospital consolidation and its cause.

The Harvard team examined hospital finances from 2010 to 2016 using Medicare Inpatient data as their focus. After adjusting for differences in markets, hospital bed size and ownership and direct competition, they used two measures (operating margin and the Altman Z score) to assess the relationship between hospital margins and market share. See below:

Operating Margin 2010

  • All hospitals: 3.36%

  • All hospitals w/ < 35% Mcare Market Share: 4.46%

  • All hospitals w/ > 65% Mcare Market Share: -.38%

Operating Margin Change 2010-2016

  • All hospitals: .06%

  • All hospitals w/ < 35% Mcare Market Share: .86%

  • All hospitals w/ > 65% Mcare Market Share: -3.07%

Altman Z Score 2010

  • All hospitals: 4.17

  • All hospitals w/ < 35% Mcare Market Share: 4.55

  • All hospitals w/ > 65% Mcare Market Share: 5.58

Altman Z Score Change 2010-2016

  • All hospitals: .87%

  • All hospitals w/ < 35% Mcare Market Share: 1.15%

  • All hospitals w/ > 65% Mcare Market Share: -.13%

The Altman Z which was originally used to predict bankruptcy and is computed as the weighted sum of working capital divided by total assets, retained earnings divided by total assets, earnings before interest and taxes divided by total assets, and equity divided by total liabilities. An Altman Z score below 1.8 has been shown to predict subsequent bankruptcy.

“The results of our empirical analyses are consistent with the consolidation-induced cost-shifting hypothesis. Relative to hospitals with a low Medicare share, hospitals with a high Medicare share had worse financial performance, which deteriorated more rapidly during the study period as Medicare inpatient prices rose more slowly than input costs. During the same period, we found that hospitals with a high Medicare share were also more likely to close or be acquired.”


The Chernow study’s major conclusion—that hospital profitability is inversely correlated to the share of its inpatient market share—is a no brainer. It justifies hospital insistence that underpayments by Medicare contribute to hospital consolidation. But the authors are quick to call out that their study shows correlation, not causality. And its dependence on inpatient-only data limits the practical value of its insight; per Deloitte, by 2030, demand for inpatient beds will shrink 44% and hospital inpatient revenue will be 35% lower. Nonetheless, inpatient care is the primary target in the hospital consolidation war between health insurers and hospitals.

Health insurers claim hospital consolidation is prompted by hospitals seeking greater leverage in negotiating contracts with payers resulting with higher prices for consumers and employers. They discount that underpayment by Medicare as THE major cause. They point to lack of competition (2 or fewer options) for high-cost inpatient services in most of the 390 U.S. markets as their prima facie evidence.

Hospitals claim consolidation is necessary to stay afloat due largely to underpayments by Medicare for inpatient and outpatient services along with other challenges unique to their businesses–unnecessary federal and state regulations, demand for modern facilities and technologies, unpredictable drug costs and workforce shortages.

They’re digging in against eerily similar circumstances:

  • Both face new price transparency regulations: the Price Transparency Executive Order for 300 “shoppable services” took effect January 1, 2021. The Price Transparency EO for Plans starts January 2022. Both sectors are pushing back.

  • The biggest players in each sector are getting bigger: the top 10 multi-hospital owners control 24% of total hospital revenue and the top 5 health insurance operators control 44% of total U.S. enrollment. Revenue and market share growth in each sector for these is at least twice that of their weaker competitors and access to capital at attractive rates a strategic advantage.

  • Both are diversifying: recognizing margin erosion in their core businesses (inpatient care in hospitals, employer-based coverage for health insurers), both now employ physicians directly, operate outpatient facilities, invest in ancillary ventures to generate “non-operating income” and grow by acquisition. And more than 300 hospitals now sponsor/operate their own health insurance plans to secure direct access to funding from government payers, employers and individuals.

The Chernow study will not settle the issue. Neither sector is on solid footing vis a vis public trust and regulator favor, so how the hospital consolidation war is waged is risky to the long-term effectiveness of both.

Analyses that cut through sectarian biases, apply practical definitions for markets, competition and consumer choice, account for diversified scale and scope of services distinctions are needed. That’s the new paradigm necessary to address the issue of hospital consolidation. Inpatient-only data is of decreasingly useful to the national discussion that’s sorely needed.

More to come.


P.S. The August 12 blog in Health Affairs by CMS administrator Chiquita Brooks-LaSure and Center for Medicare and Medicaid Innovation (CMMI) director Liz Fowler confirmed industry suspicion– that most of the 50+ Medicare alternative payment models will be ditched, and the survivors will be simpler, require greater financial risk and extend to Medicaid and commercial payors. They noted that only six generated statistically significant savings for Medicare: ACO Investment Model; Home Health Value-Based Purchasing; Medicare Care Choices; Maryland All-Payer; Pioneer ACO; and Prior Authorization of Repetitive, Scheduled Non-Emergent Ambulance Transport. CMMI plans to offer more details in the coming months. Not on their list: the Bundled Payment Care Improvement-Advanced (BPCI-A) which is getting lots of attention by academics and policy wonks who think it deserves a second look (See Industry News below). Direct Contracting-GEO is another likely to be revisited since capitation seems a likely target for policymakers. Stay tuned.


“The potential for rapid consolidation of health systems”; December 10, 2020; Deloitte

“The Performance of Provider-sponsored Health Plans: Key Findings, Strategic Implications”; AHA

Michael Chernow et al “Public Payment Rates for Hospitals and The Potential for Consolidation-Induced Cost Shifting”; August 2021; Health Affairs


Coronavirus, Delta facts as of August 22, 2021 (CDC, WHO, Johns Hopkins)

  • 60.5% of U.S. population have had at least one vaccine dose; 51.3% are fully vaccinated

  • 37,583,545 active cases plus 157,450 new cases

  • 625, 375 total U.S. deaths plus 1,120 new deaths

School masking status (August 20, 2021)

  • 13 states require staff and students to wear face-coverings in schools for the upcoming year.

  • 30 states have left school mask decisions up to local authorities.

  • 7 states—Florida, Iowa, Oklahoma, South Carolina, Tennessee, Texas, and Utah—have banned school mask requirements.


Public Opinion: Mandatory Masking Supported by Majority

According to the August 17, 2021 Axios/Ipsos Coronavirus Index:

  • 64% support their state or local government requiring masks to be worn in all public places: Democrats (88%) vs. Republicans (40%); urban dwellers (71%) vs. rural (49%).

  • 69% support their local school districts requiring teachers, students, and administrators to wear masks in schools. Broad support includes parents (68%), non-parents (70%), Democrats (92%) and Republicans (44%)

“Most Americans support requiring masks in public places, yet few report experiencing actual employer or government mandates”; August 17, 2021; Ipsos

Study: Vaccines Saved 139,393 Deaths, Additional Life Benefit up to $1.4T

Researchers analyzed the association between US state-level vaccination rates and COVID-19 deaths during the first five months of vaccine availability:

By May 9, 2021, the US vaccination campaign was associated with a reduction of 139,393 COVID-19 deaths which varied widely by state: New York (11.7 fewer COVID-19 deaths per 10,000) to Hawaii (1.1 fewer deaths per 10,000). “As of May 9, 2021, reductions in COVID-19 deaths associated with vaccines had translated to value of statistical life benefit ranging between $625 billion and $1.4 trillion.”

Gupta et al “Vaccinations Against COVID-19 May Have Averted Up To 140,000 Deaths In The United States”; August 18, 2021; Health Affairs

KFF: Admissions at 85% of Pre-Pandemic Levels in Hospitals

A new Kaiser Family Foundation analysis released last week shows hospital admissions were 85.5% and of expected levels based on historic patterns in the week beginning April 3. Admissions were lower—80.7%—when COVID-19 admissions were excluded.

Overall health spending, which includes hospitals and ambulatory settings, remains 7% below expected levels through at least June 2021, the report found. That shows pent-up demand for care that was delayed last year has so far not driven an uptick in admissions.

Gallagher et al “Early 2021 data show no rebound in health care utilization”; August 17, 2021; Peterson-KFF Health System Tracker

New York Times: Delta Exacerbates Nursing Shortage

Nursing shortages have long vexed hospitals and more than 1,200 have died from the virus. Key stats:

  • One in five I.C.U.s are at least 95% capacity.

  • There are 176,000 openings for registered nurses (BLS).

  • A third of the nation’s 3 million nurses were born during the baby boom years, with 640,000 nearing retirement.

  • The United States is producing about 170,000 nurses a year, but 80,000 qualified applicants were rejected in 2019 because of a lack of qualified nursing faculty

Andrew Jacobs “Nursing Is in Crisis’: Staff Shortages Put Patients at Risk”; August 21, 2021; New York Times

Study: Plans Suspend Out of Pocket Cost Waivers for Covid Treatment

72% of the country’s largest health plans are no longer waiving out-of-pocket costs for COVID-19 treatment, according to research released Aug. 19 by the Peterson-KFF Health System Tracker.

“Most private insurers are no longer waiving cost-sharing for COVID-19 treatment”; August 19, 2021; Peterson-KFF Health System Tracker


Bundled Payments Get Closer Look in Trio of New Studies

1-Study: Early participants in BPCI-A saw increased per episode Medicare payments

Researchers analyzed Medicare claims to assess differences between BPCI-A participants and two control groups: hospitals that never joined the BPCI-A program (non-joining hospitals) and hospitals that joined the BPCI-A program in January 2020. Highlights:

  • Among BPCI-A hospitals, the mean baseline 90-day per-episode Medicare payment was $27,315; the change in the quarterly trends in the intervention period as compared with baseline was −$78 per quarter vs. $25,994 for non-joining and $26,807 for late joining.

  • There were no meaningful differences in the changes with regard to readmission, mortality, volume, or case mix.

Maddox et al “Year 1 of the Bundled Payments for Care Improvement–Advanced Model”; August 12, 2021; NEJM

2-Study: Conveners (consultants) play key role in BPCI-A program

Researchers analyzed Bundled Payments for Care Improvement initiative Advanced Model (BPCI Advanced) inpatient clinical episode activity in 2,988 hospitals for 28 inpatient episodes to examine the role of conveners (private consultants) in the financial success of the pilots. Analysis:

  • In model years 1 and 2 of BPCI Advanced, 63.6% of clinical episodes among participating hospitals included conveners.

  • Nonteaching and for-profit hospitals participating in BPCI Advanced were more likely than other hospitals to partner with conveners than not to (91.0% versus 81.1% and 42.6% versus 15.3%.

  • A $1,000 increase in episode target price was associated with a 1.66% increase in the probability of episode participation in BPCI Advanced compared with a 0.72% increase for participating hospitals without third-party conveners.

Berlin et al “Hospital Participation Decisions In Medicare Bundled Payment Program Were Influenced By Third-Party Conveners”; August 2021; Health Affairs

3-Study: ACO coupled with bundled payments effective in reducing costs for medical episodes but inconclusive for surgical

In this cohort study of 9,850,080 Medicare beneficiaries, simultaneous inclusion in both ACOs and bundled payments was associated with lower spending on institutional post-acute care, fewer readmissions for medical episodes, and fewer readmissions only for surgical episodes compared with inclusion in bundled payments alone.

Attribution to an ACO also increased the strength of the association between bundled payments and changes in 90-day readmissions for both medical episodes and surgical episodes.

Navathe et al “Association of Patient Outcomes With Bundled Payments Among Hospitalized Patients Attributed to Accountable Care Organizations”; August 20, 2021; JAMA Health Forum

Global Comparisons: Trust in Government, Healthcare Professionals Lowest in North America Compared to Other Regions

UCLA researchers used data from the 2018 Wellcome Global Monitor survey (comprised of a nationally representative sample from 144 countries involving 149,014 adults to examine levels and correlates of trust in governments and health workers and attitudes toward vaccines. Highlights:

  • 24.5% of respondents said that they trust their government a lot: South Asia (37.0%) and sub-Saharan Africa (32.6%) vs. the Caribbean (6.3%) and North America (9.2%)

  • Overall, 42.7% of respondents said that they trust doctors and nurses a lot and this was a more common sentiment than trusting the government a lot, both globally and in every region Globally and in all regions, trust in government was strongly and positively associated with trust in doctors and nurses.

  • Globally, 46% believe vaccines are safe and effective, 31% trust government advice about vaccines and 39% trust advice from their physicians and nurses.

Corrina Moucheraud “Trust in Governments and Health Workers Low Globally, Influencing Attitudes Toward Health Information, Vaccines”; August 2021; Health Affairs

Study: MA Plans Cost Medicare $7 billion than Fee-For-Service Medicare in 2019

Kaiser Family Foundation analysts examined that Medicare Advantage enrollee costs would have been in 2019 if reimbursed by Medicare at its fee-for-service rate.

Medicare spending for Medicare Advantage enrollees was $321 higher per person in 2019 ($7 billion) than if enrollees had instead been covered by traditional Medicare. The Medicare Advantage spending amount includes the cost of extra benefits, funded by rebates, not available to traditional Medicare beneficiaries.

“Higher and Faster Growing Spending Per Medicare Advantage Enrollee Adds to Medicare’s Solvency and Affordability Challenges” Kaiser Family Foundation August 17, 2021; Kaiser Family Foundation

Altarum: Healthcare Economy Recovering Post-Pandemic

Per Altarum’s monthly Health Sector Economic Indicators (HSEI) released August 18:

  • National health spending in June 2021 was 7.7% higher than in June 2020.

  • Since January 2020, before the pandemic-induced drop began, net growth in national health spending was 1.7% through June 2021.

  • Health spending has grown more slowly than gross domestic product (GDP) in recent months and now stands at 17.4% of GDP; it was 18.0% in January and February 2020.

  • Prescription drug spending showing the greatest growth since January 2020, at 4.0%, while spending on dental services remains behind the other categories, at -10.8%.

  • Growth in the overall Health Care Price Index (HCPI) remained steady again in July, with prices 1.9% higher than they were a year ago, compared to the 2.0% growth rate seen in June, marking the fourth straight month of health care price increases at or below 2.0%.

“Health Sector Economic Indicators”; August 18, 2021; Altarum

Study: Out of Network Payments Decrease in States with Surprise Medical Bill Legislation

Researchers compared price changes before and after the passage of Surprise Billing legislation in California, Florida, and New York to 45 states that did not. Finding:

Prices paid to out-of-network anesthesiologists at in-network facilities and to in-network anesthesiologists decreased in California, Florida, and New York after each state passed comprehensive surprise-billing legislation.

Forgia et al “Association of Surprise-Billing Legislation with Prices Paid to In-Network and Out-of-Network Anesthesiologists in California, Florida, and New York: An Economic Analysis ”; August 16, 2021; JAMA Internal Medicine