Cross-Market Hospital Systems Flex Negotiating Power, to Payers’ Detriment

The rise in consolidation among hospital systems operating in different geographic areas may be hampering the competitive strength of health insurers by limiting their negotiating muscle, a new study in Health Affairs says. The pricing effects of hospital consolidation is not new. Previous research, including a 2020 report from the Medicare Payment Advisory Commission (MedPAC), shows that merging hospital systems tend to lead to higher prices. However, the new study seeks to unravel the effects of a particular phenomenon — what happens after a merger or acquisition (M&A) among hospitals that operate in different markets and the impact on downstream factors, including contract negotiations with insurers. Analyzing hospital system data, specifically transactions and pricing, between 2009 and 2019, the researchers discovered a robust trend of “cross-market power” among systems when their hospitals were situated in discrete “commuting zones,” or geographical areas where patients live and work. Hospital systems that operate in different zones but have common customers in their health insurers possess an extra oomph of negotiating strength, according to the study. Such negotiating power has coalesced in recent years: The researchers found that more than half (55%) of hospital M&A between 2009 and 2019 involved a cross-market acquisition. They also found a significant increase in the number of hospital systems that could “potentially exert enhanced cross-market power,” with a 54% increase over the 10-year period. In 2009, 37 systems were in a position to take advantage of cross-market conditions; that number increased to 57 systems in 2019. “As the hospital systems add more and more hospitals, it becomes more difficult for the health insurer to have a credible threat of walking away [from negotiations],” says Brent Fulton, Ph.D., associate research professor of health economics and policy at University of California, Berkeley School of Public Health and co-author of the Health Affairs study. The upward trend in cross-market M&A reflects current dynamics within a health care industry that has witnessed substantial provider consolidation in recent years, notes Allan Baumgarten, an independent analyst and consultant who publishes market reviews on a number of states. Fifty years ago, about 10% of hospitals were part of a system. Fast forward to 2019, and 79% of for-profit and 63% of non-profit hospitals were in a system. “There’s little room in most metropolitan areas for in-market mergers anymore,” Baumgarten tells AIS Health, a division of MMIT. Systems ‘Tie’ Hospitals Together Fulton points to the practice of “tying” hospitals together in contract negotiations as one way in which health systems gain a competitive advantage across more or less lucrative markets. “Tying enables the system to extract more surplus (for example, via higher prices) from insurers and large employers that are common customers across these markets,” the researchers state. Previous studies lend support to their view: A 2017 analysis in RAND Journal of Economics found that hospitals acquired in a cross-market merger achieved an average price increase of 17% compared to non-acquired hospitals. Other studies have shown similar, albeit mixed, reviews. For instance, a 2019 study, also in RAND, found a 7% to 9% price increase among purchasing hospitals that made a cross-market acquisition, but the results held true only when the transaction involved hospitals in the same state. The tactic of tying hospitals can cause health plans to face a competitive disadvantage if they have holes in their provider networks. Holes occur when the insurers’ network lacks a major hospital within a given market, and that can result in a handicap when competing with other insurers. Hospital systems that operate within multiple markets may also engage in what the study authors term “mutual forbearance,” or a situation where cross-market hospital systems “compet[e] less aggressively in a particular market to maintain the status quo in other markets,” the study explains. Despite the rise in cross-market M&A and the growing body of evidence signaling a competitive advantage for the players involved, these types of transactions don’t always receive pushback from regulators. Baumgarten points to a recent merger between Spectrum Health in western Michigan and Beaumont Health, previously the state’s largest system, in southeast Michigan. The new health system, rebranded in October as Corewell Health, now operates 22 hospitals and employs 64,000 workers. Neither the state’s attorney general nor the Federal Trade Commission raised a challenge to the merger, Baumgarten says. A recent affiliation agreement between Cedars-Sinai Health System and Huntington Memorial Hospital in California, however, did warrant a challenge from that state’s attorney general. “It’s the first case that we’re aware of” to specifically consider cross-market impact, Fulton says. The attorney general prohibited all-or-nothing clauses and essentially “set a firewall between the two systems when negotiating with insurers,” Fulton says. The California case may signal further regulatory action on cross-market M&A, Fulton surmises. “The growing prevalence of cross-market hospital mergers accompanied by empirical evidence that such mergers are associated with price increases demands further investigation by economists, legal scholars, and antitrust enforcers to determine the circumstances in which cross-market mergers can harm competition in health care markets,” concludes the Health Affairs study. Contact Fulton at fultonb@berkeley.edu and Baumgarten at baumg010@umn.edu. By Richard Scott