U.S. should prepare for a COVID-19 hospital consolidation surge

Grace Flaherty (@graceflaherty10) is a recent graduate of Tufts University’s MS & MPH program. She specializes in health care policy and nutrition policy and has prior professional experience at the Massachusetts Health Policy Commission and the U.S. Senate.

The COVID-19 pandemic has created a buyer’s market for large health systems looking to acquire struggling hospitals hard-hit by the pandemic. Despite claims that mergers bring greater efficiencies and more coordinated care, research suggests that consolidation increases health care costs and does not meaningfully improve quality. In addition to continuing antitrust investigations, three policy options can help maintain competition in U.S. health care markets.

Hospitals are suffering financially due to COVID-19

The pandemic has brought many hospitals to their knees. With a dramatic reduction in routine procedures and the added costs of caring for COVID-19 patients, U.S. hospitals and health systems suffered an estimated $202.6 billion in total losses between March and June alone.

Hospitals in rural and low-income areas are particularly vulnerable to these losses. Even before the pandemic, 25 percent of rural hospitals were experiencing financial strain and were at “high risk of closing.” These rural hospitals are important for maintaining health care access in the surrounding communities.

The federal government has passed billions of dollars in pandemic bailout funds to aid hospitals, but distribution of the funds has been unbalanced, favoring larger, wealthier hospital systems. As a result, some of the hard-hit small independent hospitals may close after the pandemic, leaving patients with fewer options for care.

Mergers involving financially distressed hospitals may speed up following the pandemic

Rather than close their doors during times of financial distress, independent hospitals can choose to merge with larger health systems. This is a growing trend in the U.S. health care system, which is becoming increasingly consolidated — dominated by fewer, larger health care organizations.

Now, with financial conditions deteriorating for hospitals during the pandemic, there is even more incentive for smaller independent hospitals to merge with the dominant health systems or risk going out of business.

Mergers lead to higher costs without improving quality

In theory, streamlining the health care system into a few health systems rather than maintaining a patchwork of hospitals may seem like a good idea. However, research suggests that when hospitals merge, patients lose.

Hospital administrators and national hospital associations defend mergers and acquisitions, claiming they will lead to better coordination, lower costs, and improved patient care. The American Hospital Association has published research on mergers’ consequences, which found reductions in operating expenses at acquired hospitals, reductions in readmission and mortality rates, and savings for health plans.

However, most evidence from antitrust experts suggests that hospital mergers lead to price increases and higher premiums for patients because there is less competition in the marketplace.

California provides an example of how mergers affect patients’ pocketbooks. Northern California has seen more rapid health system consolidation than Southern California. A 2018 study measuring the effect of this consolidation found that health care prices in Northern California were between 20-30 percent higher and Affordable Care Act premiums were 35 percent higher than in Southern California.

You might expect that a higher price tag means better care, but these price and premium increases are occurring without improvements in efficiency or quality. A 2020 study from Harvard researchers compared 246 acquired hospitals to 1,986 control hospitals and found that consolidation did not improve hospital performance and patient-experience scores deteriorated somewhat after the mergers.

Policies can mitigate the effects of COVID-19 hospital mergers

State and federal authorities should continue to investigate new hospital mergers and challenge potential threats to competition. However, beyond legal action, policymakers should consider three additional policy options to help promote competition and control costs.

First, merging health care entities can be split into separate bargaining units. This strategy was used by the Federal Trade Commission in the case of the Evanston merger in 2007. In theory, this policy allows patients to keep access to hospitals while hopefully keeping costs lower because insurers are bargaining with individual hospitals. However, in the case of Evanston, although payers had the option to negotiate separately with the merged hospitals, none took advantage, suggesting that they recognize the benefits are minimal.

A second option is for states to protect tiered networks, where insurers group hospitals into levels based on cost and quality of care. Tiered networks have been shown to reduce spending by steering patients toward lower cost, higher value care with cost sharing incentives. Massachusetts has passed — and other states have introduced — legislation prohibiting hospital systems from including “anti-steering” or “all-or-nothing” clauses in their contracts, thus allowing insurers to freely tier hospitals in their plans.

A third route is for states to monitor and control total health care costs through spending targets. Massachusetts was the first state to establish a cost growth benchmark with the power to penalize entities who exceed the benchmark, and other states are beginning to follow suit. Penalties for health care entities exceeding the benchmark may include fines and performance improvement plans.

These three policies cannot stop hospital mergers from occurring, but they can help reduce the degree to which consolidation drives health care prices higher. In the event of a post-COVID-19 surge in hospital mergers, these and other policies will be important for minimizing its impact on health care budgets.

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