Re-thinking Hospital Consolidation Realistically

I’m not an antitrust attorney, just a mere mortal trying to decipher how to balance the pressures of the market for hospitals and the threats from states and the feds to constrain consolidation.

Case in point: last week, the North Carolina State Attorney General sided filed suit against the Carolinas Healthcare System alleging it was guilty of using its scale to force the area’s insurers to include larger networks of providers and steer patients toward CHS. The crux of the issue is the system’s scale: a 2505 bed, 10 hospital system that serves 11 counties in North and South Carolina. NC AG Roy Cooper and the U.S. Department of Justice contend the size and scope of CHS services limits competition in the market ultimately hurting consumers who pay more. The regulators say the system is too big, asserting it controls almost 50% of its market.

I have no conflicts of interest with CHS nor with its local competitors, Novant (25%) and CaroMont (10%) but I’m befuddled. I am a part-time resident of nearby Asheville and know the area reasonably well. The facts in this case seem a bit distorted.

First, the Carolinas Health System’s market is bigger than the 11 county Charlotte metro upon which the regulators base their analysis. Like the Charlotte Mecklenburg Airport Authority, it serves an area spanning well beyond its MSA and competes for certain services with prominent systems across western North Carolina, northern South Carolina and beyond. Math that confines the definition of the Charlotte healthcare market to the immediate vicinity simply defies common sense. Charlotte is the 4th fastest growing metroplex in the country encompassing a region at the intersections of I-77 and I-85. Its competitors include reputable providers in Winston Salam, Asheville, Raleigh-Durham, Columbia SC and beyond. CHS operates clinics and offer virtual visits extending well outside the geography defined in the complaint.  Thus, the market is bigger than defined in the complaint, the denominator in the market concentration calculus is larger and CHS’ market share is smaller.

Second, consolidation the likes of CHS is a response to new regulations from Washington and market pressure to reduce costs. The Affordable Care Act introduced value-based purchasing to force hospitals to cut costs. Medicare and private insurers are requiring shared risk among large networks of providers that are fully integrated. Employers are developing carve outs for big-ticket hospital events, using reference pricing and direct contracts that encourage employees to go elsewhere for services or pay the difference if they stay home. Congress passed legislation (MACRA) cutting payments to physicians that don’t participate in their new alternative payment programs. And 39 states have elected to outsource their Medicaid programs to managed care companies that hammer hospitals for lower costs. That’s why hospitals are consolidating: just like the banking, airline, and health insurance industries, regulatory changes and market pressures force consolidation.

Third, the playing field for hospitals is different than for the insurers who are the major protagonists in challenges like this. Most health systems like CHS operate in a region; by contrast, private insurers operate on statewide or nationally. Carolina’s Health System’s insurer market is dominated by mega-plans bigger and financially stronger than CHS: for 2015, CHS had $9 billion in revenues compared to BC-NC. $8.2 billion in revenues linked to Blue Cross Blue Shield Association’s 36 plans with $329 billion in, Aetna with $60 billion, United with $157 billion and Cigna with $38 billion. Their reserves are more than CHS’ and their borrowing power significantly stronger. What they have in common with CHS is a dramatic shift in their core business: CHS is transitioning from hospital services to a wider range of health and well-being programs serving the healthcare needs of the total population, not just the sick. Insurers are transitioning from managing actuarial risk for employers and individuals to government contracts, health exchanges and diversified health services. But that’s where the similarities end. Insurers can enter and exit markets annually at their discretion. They can deploy capital and set premiums to suit the wishes of their investors and lenders. Each year, they can adjust premiums, modify plan designs, cancel unprofitable policies, alter provider networks, and withhold services from those who don’t pay their premiums. By contrast, hospitals don’t have these options. Capital investments for technologies, facilities and clinical innovations are long term bets; insurers make shorter term bets and then hedge against their statewide and national scale.

So no doubt the case against CHS will continue. There are precedents i.e. FTC v Phoebe Putney and others that challenged consolidation of local hospitals. But perhaps it’s time to take a fresh look at how consolidation in healthcare is being umpired and how the game is played. How markets are defined for purposes of calculating provider concentration should be revisited. After all, not all healthcare is local, and the healthcare market is much bigger than beds and discharges. Perhaps regulators should revisit their laws that encourage integration in clinical networks capable of assuming financial and clinical risk and apply antitrust challenges consistently and clearly.

NC v. CHS is the latest system to be challenged by regulators with prompting from insurers hoping to win the leverage game. There are scores of other systems in similar situations that could have been the target of this action by the AG. Hospital costs are an issue and credible studies show that hospital consolidation does not lead to lower costs necessarily. Market pressure to optimize efficiency is a legitimate focus for payers including Medicare and others. But hospitals can’t control drug costs, or increasing numbers of uninsured that crowd emergency rooms, or physicians who can’t continue to practice because their overhead’s too high. They try. Stay tuned. This story is not going away. Maybe it’s time to rethink hospital consolidation realistically.