How Consolidation Is Changing Healthcare Markets

Affiliation and mergers are leading to ripples and waves of anticipated, and unanticipated, consequences.

Classic antitrust analysis suggests that any consolidation leads to market power, which leads to changes for buyers and sellers, which then changes prices. However, this high-level analysis is only marginally helpful for understanding what really happens. There are many forms of healthcare consolidation, and each buyer and seller has different options to consider. And often, there also are several rounds of change before prices and other indirect outcomes are established.

Will a consolidation effort lead to lower prices, higher prices, or no change? The answer is in the details, as can be seen in the following variations on a hypothetical scenario.

A Consolidation Scenario

Let’s assume that three health systems decide to combine forces on value-based payments, population health management, and a clinically integrated network (CIN). The consolidation enables them to reduce the cost of new program development and to establish a large population base that they can serve in a coordinated manner.

The next steps under this scenario depend in part on the actions of others. For example,

the service area includes a highly dominant health insurer, with 75 percent market share, and it is uncertain whether this dominant insurer will choose to alter its strategy and work with the three-system CIN to lower costs. The health systems have other options, however, including forming a provider-owned health plan. Here, we consider three possible outcomes of the health systems’ consolidation strategy.

Scenario Variation A. Under this variation, the dominant insurer declines to share the savings of the lower cost of care with the three systems, so the systems work to increase the market share of a second large national payer that is willing to share the savings. Possible results from this approach include the following:

• The dominant insurer’s market share is reduced from 75 percent to 50 percent, and its profits are likewise reduced.
• The three health systems benefit from sharing in the cost savings that are created, realizing increases in both market share and profits.
• Employers see no change in costs, but a slight benefit in employee options and access.
• Patients that receive care from the new CIN benefit slightly—mostly from improved access to care.
• Total cost of care in the market is unchanged.

Scenario Variation B. Under this variation, the dominant insurer declines to share the savings with the three health systems, so they decide to start their own health plan. In this case, the three health systems might see essentially the same results as under Variation A, except they might miss making a profit if health plan start-up costs were to exceed the improvement in operating margins, which could easily occur.

Scenario Variation C. Here, the dominant health plan chooses to share profits with the new three-system CIN. This scenario might produce the following results:

• Both the insurer and the CIN achieve greater profits.
• Some gains can be shared with patients and employers.
• The total costs of care are not reduced to the extent that they could be.

The Impact Chain

It’s nearly impossible to understand the impacts of an affiliation or merger without tracing more than one level of impacts. For example, the expected initial impacts from each of the variations of our scenario are illustrated in the exhibit below.

Initial Impacts of a Scenario Involving a 3-Health-System Coordinated Strategy: 3 Variations

The best initial outcome overall—good profits for the payer, a share of profits for the three-system CIN, lower total costs in the market, and the potential for a lower price to patients and employers—is Variation C, where the dominant player accommodates and leverages the new CIN.

However, such a result seldom happens. More often, the CIN and dominant insurer hold their ground and compete with each other in some form: The dominant insurer does not want to change, while the three-system CIN hopes to make a profit and to change the playing field.

Variable Results

Over time, a successful new CIN usually kicks off several other new initiatives. But many are not successful and have no significant impact.

The following are key factors that ultimately will determine the impact of our scenario:

• Whether the CIN can succeed and generate savings over time, and whether it leads to changes in physicians, patients, and others— 
or fails to make any fundamental changes (in which case, it will become inconsequential)
• Whether the CIN’s initiators are intent upon a game-changer or they developed the CIN as a defensive move
• Whether other health systems in the service area develop their own consolidated approach to care
• Whether the dominant health plan changed its approach over time, especially if other CINs emerge
• Whether three health systems that formed 
the CIN develop other joint actions, such as initiating a Medicare Advantage plan, joining a common supply chain, or pursuing a larger IT or health plan initiative across several markets

Other scenarios will lead to different outcomes. Even for this one scenario, the answer is in the details, and answer will certainly vary from one market to another.

Keith D. Moore, MCP, is CEO, McManis Consulting, Denver, and a member of HFMA’s Colorado Chapter.

Dean C. Coddington is a senior consultant, McManis Consulting, Denver.