Mitigating the Growth of Horizontal & Vertical Consolidation among U.S. Hospitals due to the COVID-19 Pandemic
By: Pratik Thakur
Date Published: October 14th, 2021
Throughout the United States, the increase in hospital consolidation has been one of the most worrying trends since it often leads to less competition causing higher prices and not substantial improvements in quality of care. There are two main types of hospital consolidation that are occurring in the country: horizontal and vertical consolidation.
Horizontal consolidation is when hospitals merge together, creating a larger market share for their combined hospital system. One example of horizontal consolidation is the Stanford Health Care and ValleyCare Health System merger in 2015. This event commonly results in a less competitive market naturally with fewer entities involved. In vertical consolidation, the hospital acquires medical practices, increasing the number of physicians it employs. 8,000 medical practices were acquired by hospitals from July 2016 to January 2018 which caused 14,000 physicians to transfer their employer from private practice to hospitals.
Currently, the COVID-19 pandemic’s negative impact on revenue and medical utilization has increased the rates of both horizontal and vertical consolidation. This is highlighted in a survey taken last year in July where 60 of the 230 independent physician practices surveyed have considered a partnership with a larger entity because of the pandemic’s effects. By the fall of 2020, hospital mergers began taking place, notably the Atrium Health and Wake Forest Baptist Health merger in October which formed one of the largest health systems in the U.S. with a total of 42 hospitals across the four states of Georgia, Virginia, North Carolina, and South Carolina. As this combined entity, they are expected to have a net revenue of $11 billion.
There are a number of factors that have contributed to consolidation. The first is how health insurance plans attempt to offer the greatest number of clinicians and health care centers to employers so that it is beneficial for their employees to get treated at as many places as possible. However, when consolidation occurs, payers have a limited number of options, leading to pricing increases. This incentivizes hospitals to merge and/or acquire practices because they can have the power in the market.
Because of the status of antitrust regulations, hospital consolidation is in fact backed because of how health care’s local markets are defined when utilizing tertiary hospital catchment areas or hospital referral regions. Hospital referral regions (HRRs) were made from the patterns of referrals among hospitalization in the cardiovascular and neurosurgery sectors from the 1992-1993 Medicare data. Antitrust enforcement agencies still use these HRRs even though they are outdated. Additionally, HRRs incorporate a larger region than what is viable for patients, like how the Manhattan HRR has all of the NYC boroughs despite Manhattan residents most likely not traveling there for treatment. Overall, the pricing power of hospitals will be greater than what it shows in its HRR market share.
Future steps to take on consolidation is to create a new way for antitrust regulators to define hospital markets or at least update the HRRs. Also, developing fair market definitions where having more than 50% of the market share will make the hospital have a market-dominant hospital (MDH) designation. This label can alarm antitrust entities and regulation of these MDHs can help reduce horizontal consolidation. Then, vertical consolidation can be addressed through the use of an MDH redistribution fund (MRF) whose beneficiaries include hospitals and physician groups that are having financial issues.
Citation: Kocher, Robert P., Soleil Shah, and Amol S. Navathe. “Overcoming the market dominance of hospitals.” JAMA 325.10 (2021): 929-930.