Consolidation of Providers: Better Integration, or Threat to Competition

Today’s Managing Health Care Cost Indicator is 40%

The Washington Post  had an article last week about Carilion Health System, in Norfolk VA.  The hospital system credits a merger that created the system with allowing the creation of a true integrated delivery network. Not everyone agrees. 

The Wall Street Journal had an article in 2008 about this system. The US Justice Department opposed the merger that created Carilion, but lost in court.  The WSJ noted that over two decades southwestern Virginia health insurance rates went from the lowest in the state to the highest.

The Robert Wood Johnson Foundation  reported in 2006 that mergers of nearby hospitals are associated with cost increases of as much as 40%.   Of course, it’s easy to know what happens with hospital charges, and measuring what happens with actual payments is substantially more difficult.  Here’s a link the classic Uwe Reinhardt paper in the chaos of hospital pricing.   Harvard Link

The CEO of Carilion, Edward Murphy says “"We need to fundamentally get off a transaction system where you're paid for what you do to patients to being paid to care for them."  The real question is whether Carilion will accept a change from the fee for service system that has treated them very well.  The WSJ noted that colonoscopies at Carilion are billed at over $4700!

Many communities are facing the question of whether to support the development of accountable care organizations, or whether to promote more robust competition among providers.  It’s a tough choice – we all want better coordination, but on the other hand we worry that more bundling of payments will lead to diminished consumer choice.

Here are some questions I’d ask from a public policy perspective about the move toward greater provider integration:

1)     Is the integrated entity accepting accountability for the cost and the quality of care.   If the integrated entity insists that all payments continue to be fee for service, cost is likely to increase with more integration.
2)     Will the integrated entity commit to robust transparency, sharing process metrics, as well as outcome metrics.   These outcomes should be risk adjusted – but risk adjustment shouldn’t be an excuse to delay disclosure for an inordinate period of time.
3)     What is the integrated entity doing to lower the resource cost of care delivery within its own system?  The more it is doing, the better the chances that further integration will lower costs.  I’m seeing more hospital systems looking to move past fee for service. Integration can help providers have the depth and scale to lower costs.  But getting larger can also give providers the leverage to keep charges artificially high, and thus prevent cost savings. One cautionary note is that disruptive innovation is likely to help drive lower health care costs –but larger, more complex organizations are more likely to resist disruptive innovation.
4)     Will there still be competition after the merger?  In Carilion’s case, the answer seems to have been “no.”  Without competition, it’s hard to drive lower costs and force greater efficiency.  Since care delivery is local, competition has to be defined in a narrow geographic area.