Federal policy drives hospital-practice deals but not M&A between hospitals, MedPAC finds

• Federal policy is not directly driving hospital consolidation, but it does affect practice acquisition, MedPAC said.
• Hospital consolidation and health plan consolidation are correlated, according to the group.
• The findings led MedPAC to double down on its push for site-neutral payment policies in Medicare.

Federal payment policies are not driving mergers and acquisitions (M&A) between hospitals but are encouraging hospital acquisition of physician practices, according to an analysis by staff of Congress’s primary Medicare advisory body.

Other key conclusions of a hospital M&A analysis by staff of the Medicare Payment Advisory Commission (MedPAC) include:

• M&A is associated with higher commercial health plan prices.
• How consolidation affects hospital costs and quality is unclear.
• Mergers have little effect on beneficiary cost sharing.

The analysis came to very different conclusions about hospital acquisitions of practices, including:

• Such activity leads to higher prices in Medicare and among commercial health plans.
• Hospital acquisition of practices increases beneficiary cost sharing.
• Such deals can be disincentivized by site-neutral payment policies.

The findings — and policy tweaks urged by MedPAC commissioners — will be included in MedPAC’s annual 2020 report to Congress, which legislators regularly use to identify priorities. The analysis of the two trends and their significance for Medicare was specifically requested by Congress.

MedPAC members expressed concerns about the underlying trends in provider consolidation. Specifically, a MedPAC staff analysis of hospital data concluded that the share of “super-concentrated” markets increased from 47% in 2003 to 57% in 2017. Similarly, hospitals employ a growing share of physicians — 44% in 2018, up from 26% in 2012, according to the Physicians Advocacy Institute.

Paul Ginsburg, PhD, vice chairman of MedPAC and a health policy expert with the Brookings Institution, said the Federal Trade Commission (FTC) is waiting for more data on adverse effects before launching more enforcement efforts against hospitals’ acquisition of practices.

Link between Medicare, commercial payment rates draws scrutiny

Key points raised during the MedPAC commissioners’ discussion of the report included the cost shifting hospitals have said occurs when stagnant Medicare rates drive the need for higher commercial health plan rates.

Brian DeBusk, PhD, a commissioner and CEO of DeRoyal Indstries, said hospital consolidation leads to higher commercial health plan rates, which not-for-profit (NFP) hospital executives use to provide more services. Specifically, he cited NFP hospital spending to meet the facility and technology demand of physicians and to address the consumerism trend among patients.

MedPAC staff warned that as the payment rate gap between commercial health plans and Medicare continues to widen, more practices may limit the number of Medicare patients they treat.

Additionally, higher commercial health plan rates could lead providers to get away from disciplined approaches to controlling costs, which could increase costs to the Medicare program.

Various M&A trends should be considered

Some commissioners worried that the M&A analysis didn’t consider countervailing trends among other types of providers.

For instance, ambulatory surgical centers and freestanding imaging centers have proliferated in recent years and offer lower-cost alternatives to core hospital functions, noted Warner Thomas, president and CEO of Ochsner Health System.

“There is a lot less concentration in services that have been traditional hospital services,” Thomas said.

MedPAC staff noted a correlation between the concentration of health plan markets and of hospital markets.

“It appeared to me that the national insurers may have a lot more consolidation than if you look at hospitals or practices,” Thomas said.

DeBusk warned that the adequacy of Medicare rates is nearing a tipping point because Medicare does not attempt to cover total costs, only variable costs. He noted that only 7% of Medicare payment goes toward covering hospitals’ fixed costs, and Medicare will cover no fixed costs within a few years based on current trends. That eventually would eliminate any incentive to accept Medicare patients and is an “untenable situation,” he said.

“My takeaway is we have to change the way hospitals are paid,” DeBusk said.

Thomas of Ochsner said the report needed to address the true drivers of consolidation: the increasing number of Medicare beneficiaries and inadequate Medicare payment.

Commissioners said other trends that have impacted provider M&A include:

• Purchases of practices by insurers
• Growth of nonhospital-owned outpatient facilities
• Consolidation among other healthcare segments, such as pharmacy benefit managers and insurers

Health plan consolidation affects value-based payment

Lawrence Casalino, MD, PhD, a commissioner and chief of the health policy and economic division at Weill Cornell Medical College, said value-based contracting by physician practices has been severely impacted by consolidation among health plans. He specifically pointed to recent purchases by large insurers of smaller insurers that were heavily contracted with practices. In such situations, the local hospitals can benefit because ending such deals removes practices’ negotiating leverage with hospitals.

Casalino said that there is a “strong sentiment” among the FTC that vertical integration should not increase prices. However, that view is sharply at odds with the effects of such deals as experienced by hospitals, health plans or practice executives.

Additionally, he said hospitals can use their leverage to balk at even the small amount of risk sought by the federal government.

Jaewon Ryu, MD, JD, a commissioner and president and CEO of Geisinger, said when hospitals acquire practices without subsequently designating them hospital outpatient departments (HOPDs), the effect on quality can be beneficial due to improved care coordination. He supported stopping hospitals from using the HOPD designation to get higher rates while encouraging such deals to help hospitals launch accountable care organizations (ACOs), for instance.

Dana Gelb Safran, head of measurement for Haven, countered that Medicare data shows physician-led ACOs perform better than hospital-led ACOs.