Economic Scene

Eduardo Porter: St. Luke’s case reflects conflicting U.S. laws

Mergers may improve care while creating costly monopolies

NEW YORK TIMES NEWS SERVICEFebruary 19, 2014 

St. Luke's Medical Center downtown, hospital

St. Luke's Regional Medical Center in Downtown Boise.

DARIN OSWALD — doswald@idahostatesman.com Buy Photo

With the midterm elections fast coming into focus, politics in Washington will remain consumed by health care for months to come.

Democrats worry that the flagging support for expanding health care insurance may not recover soon enough from its botched introduction. Republicans are leaving no stone unturned in search of Obamacare horror stories to stoke further discontent.

This political theater, however, has little relevance to the actual delivery of medical services. For that, the debate that matters has been taking place far from the klieg lights, in a remote courthouse in Idaho, where a federal district judge last month sided with the Federal Trade Commission and ordered the unwinding of the merger between the state’s biggest hospital system and its biggest independent network of doctors.

The ruling against St. Luke’s Health System’s 2012 purchase of the Saltzer Medical Group underlined a potentially important conflict between the nation’s anti-monopoly laws and the Affordable Care Act.

The new law has encouraged the creation of big, broad accountable care organizations, which are paid to keep patients healthy rather than for individual services.

“We want to be providing a more coordinated product that delivers health care at a lower overall cost to the community we serve,” Christine Neuhoff, general counsel at St. Luke’s, told me. She suggested the hospital would most likely appeal the decision. “This was part of our implementation of that vision,” she added.

Paradoxically, Judge B. Lynn Winmill seemed to agree. In his decision, he noted that the merger, had he let it stand, would probably have improved patient outcomes: “St. Luke’s is to be applauded,” he wrote, “for its efforts to improve the delivery of health care in the Treasure Valley.”

Still, he slapped it down because the merged group, he reasoned, would be able to demand higher reimbursement rates from health insurers and raise rates for services like X-rays, pushing up health care costs for consumers. “There are other ways” to obtain the desired efficiencies that “do not run such a risk of increased costs,” he concluded.

St. Luke’s is not alone in pursuing this strategy. In the last few years, hospitals have been merging and snapping up physician networks to improve their bargaining power with health insurers and to capture a larger share of the patient pool. The new health care law provided extra motivation and a potential justification to boot.

“Consolidation has gone up a lot in the wake of the ACA,” says David Cutler, an economist at Harvard who specializes in the study of health care. “A good deal of that is because the idea is to foster coordination within the health system, and coordination is often easier within a firm than between firms.”

THE COLLAPSE OF THE INDEPENDENTS

Ten years ago, hospitals owned a quarter of the physician practices in the country. By 2011, they owned half. A substantial majority of hospitals are now part of health systems, a trend that continues apace: 247 hospitals merged in 2012, according to the American Hospital Association, three times as many as in 2008.

The urge to merge is bending many doctors out of shape. Marc Silver, an orthopedic surgeon in Stamford, Conn., says his practice declined to be absorbed by Stamford Hospital partly because it would mean a loss of freedom. Now he worries over lost referrals as the hospital moves everything in-house. “Their rationale is all to feed the home base,” he says.

The relevant question, though, is whether this process will prove benign. Will it push the health care industry from the expensive fee-for-service model to one that does a better job at rewarding good outcomes while keeping a lid on costs? Or will it spawn oligopolies that can squash smaller rivals and charge whatever they want for care?

“Most markets in the country are already highly concentrated and they are becoming more so,” says Martin Gaynor, who oversees the Bureau of Economics at the Federal Trade Commission. “We are paying attention.” While the FTC’s track record has been mixed, in the last few years it has won a string of rulings against hospital mergers. The decision in Idaho was significant for being the first about the acquisition of a doctor group.

The health care industry has long defied traditional market expectations. Indeed, despite the consolidation, spending has, in fact, been growing at its slowest pace in years. And health care reform may be a reason.

“It’s certainly true that the consolidation of physician groups and hospitals can lead to greater market power and higher charges to insurance companies,” says Jonathan Skinner, a health care economist at Dartmouth. “But the insurance companies are creating narrower networks of providers. So providers who try to charge more risk getting dropped entirely from the now narrower network.”

CONSOLIDATION + CONCENTRATION = HIGHER PRICES

Nonetheless, there are reasons to worry. “Hospital consolidation generally results in higher prices,” concluded a recent survey of existing studies by Gaynor and Robert Town of the University of Pennsylvania’s Wharton School. “When hospitals merge in already concentrated markets, the price increase can be dramatic, often exceeding 20 percent.”

They contended that the consolidation of hospitals and doctors practices, mostly aimed at increasing hospitals’ bargaining clout, “has not led to either improved quality or reduced costs.”

In 2011, the FTC and the Justice Department’s antitrust division set guidelines for hospitals looking to transform into affordable care organizations. Mergers that captured up to 30 percent of the service market would be allowed to go ahead as long as providers were not deemed exclusive to the affordable care organization.

That might not be enough. In a recent report, Cutler and Fiona Scott Morton of Yale suggested new regulations to complement antitrust law. They proposed forbidding dominant hospitals from demanding that health plans impose the same cost sharing at all hospitals in their network, to allow plans to charge more at costlier institutions and empower consumers to choose cheaper options.

They urged new policies to foster the quick replacement of fee-for-service models with bundled payments that encourage cost saving. And “if there is no other way to obtain good care except through monopoly organizations,” they wrote, policy makers could directly “regulate prices or total spending.”

Even some of the most enthusiastic supporters of the new health care law have called for caution. “There is a tension between the benefits of coordinated care and the possible consequences of market power,” says Jonathan Gruber, an economist at the Massachusetts Institute of Technology who helped shape the new law. “The ideal might be to set things up so they are easily unwindable.” Just in case they don’t work.

Eduardo Porter writes the Economic Scene column for The New York Times.

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