Cross-market hospital consolidation may harm competition

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Although hospital consolidation within markets has become a common practice, consolidation across markets is on the rise, with research in Health Affairs suggesting this may harm competition.

Economic theory predicts – and evidence is emerging – that cross-market hospital systems raise prices by exerting market power across markets when negotiating with common customers, primarily insurers.

The share of community hospitals that were part of larger health systems increased from 10% in 1970 to 67% in 2019, resulting in 3,436 hospitals within 368 systems in 2019. 

Of these systems, 216 (59%) owned hospitals in multiple commuting zones, in part because 55% of the 1,500 hospitals targeted for a merger or acquisition between 2010 and 2019 were located in a different market than the acquirer.

Based on market-power differences among hospitals in systems, the number of systems in urban commuting zones that could potentially flex their enhanced cross-market power increased 54%, from 37 systems in 2009 to 57 systems in 2019.

WHAT'S THE IMPACT?

The effects of cross-market consolidation are only beginning to be understood. But since more than half of mergers and acquisitions over a nine-year period qualified as cross-market, evidence is emerging that this trend could have negative effects on market competition, enabling hospital systems to increase prices through cross-market power.

Perhaps, in part, because the trend is relatively new, none of the cross-market mergers in the Health Affairs analysis were challenged by regulators. The only real pushback to such a merger was in 2020, when the California Attorney General's Office sought to impose conditions on the proposed affiliation between Cedars-Sinai Health System and Huntington Memorial Hospital. 

The state's AG approved the merger only if Huntington and Cedars-Sinai accepted what was called "competitive impact" conditions. One of the conditions put price caps on Huntington's rates to insurance companies for at least 10 years, without requiring that the insurance companies pass their savings on to consumers. Another condition required Huntington and Cedars-Sinai to agree to insurers' demands for "winner-take-all" arbitration in contract negotiations.

In 2021, the hospitals filed a lawsuit challenging the conditions for approval of their affiliation. The lawsuit alleged that the conditions for approval would jeopardize the hospitals' ability to provide access to coordinated, specialized healthcare; lower costs; and provide resources needed for Huntington Hospital to continue certain clinical programs and services.

According to Pasadena Now, California agreed to settle the hospitals' objections.

THE LARGER TREND

Merger and acquisition activity between hospitals and health systems remained low in the third quarter of 2022, with just 10 announced transactions – comparable to the third quarter of 2021, which saw seven announced transactions, according to an October analysis from Kaufman Hall.

Yet while the volume of announced deals was scant, the value of the deals that did occur remained high. Two deals in the quarter met the definition of "mega" transaction, defined as when the smaller party in a deal sees annual revenues in excess of $1 billion.
 

Twitter: @JELagasse
Email the writer: jeff.lagasse@himssmedia.com