Hospital Consolidation and Cost Containment | RMHP



The Effect of Larger Hospital Systems

Many health care experts in the 1990s believed the consolidation of hospitals into larger systems would enhance access to services, improve quality of care, and create efficiencies through greater purchasing power and economies of scale.


Now they are not so sure.


Recent studies by the Robert Wood Johnson Foundation, the Health Research Institute, Physician Executive and Forbes columnist Avik Roy cast doubt on this.  In their research, they found a correlation between hospital consolidation and significant increases in what these hospitals charged for their services. Not only did their costs rise but the research also found other hospitals in the same area raised their prices as well.


The emergence of managed care in the 1990s may help explain why this occurred.  Prompted by the need to stem the rising cost of health care, managed care organizations (carriers and HMOs) focused on controlling both the use of health care services and how much they cost.


Hospitals are the largest portion of these costs.  Therefore, they received considerable attention.


When hospitals operated as a single facility, they were at a disadvantage in negotiating rates with insurance carriers and HMOs.  If the carrier or HMO could not reach agreement with a hospital over the fees it charged, they could simply drop the hospital from their network.  Many hospitals could not afford to lose the volume of business this represented.


Hospital consolidation helped to reverse this situation.  Larger systems, which controlled a number of hospitals in a geographical area, were in a much stronger position to negotiate the terms of the agreement.  While consumers could often accept the absence of one hospital from a carrier or HMO’s network, losing an entire system was quite another thing.


Denver has seen its share of hospital consolidation.  HealthOne, Centura and Exempla are all examples of this.


Recently, University Hospital and Poudre Valley Hospital merged into a single system.  Both were strong hospital systems in their own right.  In this case, health care reform played a role in the decision to merge the two systems.


The reality is the current system isn’t working (please see the blog article Who Pays the Bill- Cost Shifting from the Public to the Private Sector).  Cuts in entitlement programs (Medicare and Medicaid) will continue to put pressure on hospital revenues and margins.


The traditional strategy of making up for this shortfall in public program reimbursement by charging the private sector more can not continue forever.  Hospitals need to find new ways to deliver quality care more efficiently.


Accountable Care Organizations (ACOs) may be one way hospitals and physicians can achieve this.


In ACOs, physicians and hospitals work together to provide the most efficient patient care possible by coordinating care across settings and measuring results.   Under the ACO model, HMOs, carriers and other payers base their reimbursement on how well the provider manages the patient’s care, instead of the fee-for-service model where reimbursement rates are based on how many services the provider performs.


At this point, few hospitals or physicians participate in ACOs.  In an August 2012 Issue Brief, The Commonwealth Fund reported only 13% of hospitals it surveyed are either participating or plan to participate in an ACO.  This percentage may grow as the pressure to contain costs increases.


It is too early to know how successful ACOs will be.  Hopefully, they will prove more successful at containing costs than hospital consolidation seems to have been.