Ch. 7 - Taking the Free Market Out of Health Care
Corinne Rezentes, DO; Sahar Rammaha; Jordan M. Warchol, MD, MPH, FACEP
As emergency physicians, we are impacted by health care consolidation within the market, including mergers or acquisitions and affiliation agreements between different entities. These mergers can lead to the closure of facilities, changes in contracts, and change in market competition. Small private practice groups are becoming scarce as physician groups merge or are bought and integrated with hospitals and health systems.1 The driver behind consolidation is that it carries the potential to enhance coordination of care and cut costs; however, there is also a reduction in competition, which often causes higher prices. Physician groups face challenges in negotiating for fair compensation when large insurers dominate the market in their geographic areas.
Horizontal and vertical integration is creating widespread health care consolidation, which leads to market distortions on various levels that affect both consumers and physicians.
Why It Matters to EM and ME
Years ago, a graduating EM resident would often join a private group that had contracts with hospitals to staff emergency departments. Now a graduating physician is more likely to join a hospital or health system that is a product of a merger or exclusive collaboration between a previously independent physician group and hospital. The labor-related impacts of these mergers on emergency physicians is slowly becoming better understood and will continue to be a point of interest in the future.
How We Got to This Point
The U.S. health care system has prided itself on choice and competition, two essential ingredients to a functioning private market. In other words, the capitalist principles that the non-health care sector enjoys should be reflected in the U.S. health care system in order to generate innovation and lower prices. In this vision, patients, as consumers, have the freedom to choose their doctors, hospitals, and pharmacies. Currently these “choices” are severely restricted, as they are entirely dependent on the patient’s insurance. Simply put, insurance companies pay all or part of a bill for health care provided to the patient (aka consumer). As a result, the market dynamics seen in other sectors of the economy do not apply. The buyer and seller are no longer the doctor and patient, but instead the consumer and their insurance company and the insurance company and providers of health care.
Current State of the Issue
Free Market in Health Care
In order to understand the structure of health care, there are a few terms we need to define in the current market. Health care services (hospital stays, professional services, pharmaceuticals, and medical devices) are the commodities that are being provided to consumers, or patients. The providers in this case are physicians and supporting institutions. Insurance can be thought of as a third-party intermediary that oversees the payment for said transaction. In most cases, the insurance company will have a negotiated fee it is willing to pay the providers for the services provided to the patients.1 The “free market” allows for significant price variation for services between hospitals and insurers as they determine the prices.2
Consolidation within health care has been ongoing in the United States for quite some time. These consolidations have and will continue to change the health care market, as groups that previously competed merge to become a single entity.1 Consolidations have been both horizontal and vertical.
- Horizontal consolidation happens when two entities in the same line of work combine: hospitals acquiring other hospitals, physician groups joining with other physician groups, or two insurers becoming one company. As of 2013, 60% of U.S. hospitals were part of a larger health system.1 In recent years, these horizontal integrations have been extensively investigated due to the very real concern that physician groups joining with competitors in concentrated markets could lead to decreased competition and higher prices.3
- Vertical integration occurs when two entities in different areas of health care combine, such as when insurers combine with health systems or hospitals merge with physician groups.4 Between 2014 and 2018 there was an 89% increase in hospital and health systems becoming owners of physician practices.5
Consolidation is predominantly occurring because it increases the negotiating power of the large, consolidated health care entity.1 The insurance companies and provider groups negotiate with each other, and both are looking to acquire leverage in order to get the most beneficial contracts possible. Additional reasons for consolidation include cost savings due to efficiencies of scale, improved quality of care by improved integration and care coordination, and access to advanced technology.1 The Affordable Care Act (ACA) encouraged vertical consolidation with the creation of Accountable Care Organizations, which heavily incentivize care coordination. These larger, vertically and horizontally integrated health systems can arguably be more efficient, offer more opportunities, and – in theory – decrease costs. However, a RAND study found that a physician organization being affiliated with a health system did not reliably predict an increase in care quality or efficiency.4
As insurance companies also consolidate, the consequences of a decrease in available insurers in a given geographic area must be considered. The National Bureau of Economic Research found that adding just one more insurance company to a market caused a reduction in premium prices of 4.5%.6 This alone would bolster the argument that insurance company mergers are not in the consumer’s interest.
Insurers argue they are being driven to consolidate because changes legislated in the ACA are decreasing their profit margins. Unlike before the passage of the ACA, insurers cannot deny patients coverage due to pre-existing conditions and limits are set on the percentage of premiums that insurers can take for profit and “administrative expenses.”7
Others argue that the ACA is not entirely to blame, as demonstrated by the fact that consolidations have been happening for many years, including those that occurred well before the ACA was signed into law.
While the power of the government to control health care consolidation has limitations, President Joe Biden issued an executive order stating it would be the policy of the administration “to enforce the antitrust laws to combat the excessive concentration of industry, the abuses of market power, and the harmful effects of monopoly and monopsony — especially as these issues arise in… health care markets (including insurance, hospital, and prescription drug markets).”8 States also have a role to play in regulating mergers and acquisitions. State attorneys general can improve information sharing across departments and with the federal government to ensure that potentially anticompetitive mergers are reviewed, and states can use litigation to challenge anticompetitive behaviors by large health care organizations that violate state law.9 Washington State recently required that all potential mergers involving a hospital or physician group be sent to the attorney general for review.9
Multiple large health care mergers have occurred in recent years. In 2018, Aetna and CVS combined in a $69 billion merger of Aetna’s insurance business and CVS’ pharmacy business.10 This merger was not only horizontal, as the two companies provided the same services in Medicare Part D and pharmacy benefit management (PBM) services, but also vertical, as Aetna previously purchased services (PBM and pharmacy) that CVS sold. The AMA opposed the action out of concern that it would have negative consequences for patients and physicians, as did several states, which changed some of the terms of the merger, although the deal still went forward.11 In 2019, UnitedHealth Group acquired DaVita Medical Group (not including their dialysis business) in a $4 billion deal. This merger drew scrutiny from the Federal Trade Commission (FTC), particularly because of the potential for a monopoly in the Las Vegas area. For the deal to move forward, the companies needed to divest themselves of a DaVita health care provider organization in Nevada.12 In 2022, the FTC sued to block two different hospital mergers in an effort to enforce competition laws, consistent with Pres. Biden’s executive order.13
Many emergency physicians are concerned that health care consolidation will increase costs of care while decreasing physician bargaining power and independence of practice. MedPAC concluded in its 2020 report that hospital consolidation is leading to higher commercial prices and higher costs to patients without definitive evidence of an improvement in care.14 Consolidation between employers of emergency physicians is another area of concern in our specialty. The number of emergency physicians working in large, national groups increased from one in seven in 2012 to one in four in 2020.15 In a 2022 letter to the FTC, ACEP President Gillian Schmitz stated that, “While there are some benefits to acquisitions and mergers, including the ability for EM practices to stay profitable and negotiate fairly with insurance companies, the potential anti-competitive labor-related effects must not be ignored—since they could impact wages, non-cash benefits, right to due process, autonomy for medical decision-making, and the ability to serve patients.”16
Effects on Individual Employment
Health care consolidation affects physicians’ individual employment options as well, especially when health care systems force employees to agree to draconian non-compete clauses. In 2023, the FTC proposed a ban on non-compete clauses in all employment contracts (across all sectors), an act vigorously supported and closely watched by ACEP as the rulemaking process continues.17,18
Emergency physicians should advocate for the FTC and DOJ to continue to investigate mergers and consolidations of physician employers with guidelines that address labor-related impacts including anti-competition, wages, right to due process, autonomy for provider medical decision-making.16 Mergers and consolidations that create insurer monopolies should also be investigated, as physicians must retain sufficient negotiating power to ensure fair compensation for services provided to patients.
Individual physicians can advocate in a variety of ways. Letters can be written to elected representatives to ask for or encourage a FTC or DOJ review, and physicians can submit comments directly to the FTC or DOJ for ongoing reviews.
- Horizontal and vertical integration is creating widespread health care consolidation, which leads to market distortions on various levels that affect both consumers and physicians.1,3,15
- Emergency physicians can advocate for the FTC and DOJ to investigate mergers and acquisitions which may lead to abuses of market power, whether the merging entities are physician employers or insurance companies.
- McMonagle M, Quincy L. Addressing Consolidation in the Healthcare Industry. Altarum Healthcare Value Hub. Research Brief 10;2016.
- Reinhardt UE. The pricing of U.S. hospital services: chaos behind a veil of secrecy. Health Aff (Millwood). 2006;25(1):57-69.
- Greaney TL, Scheffler RM. The Proposed Vertical Merger Guidelines And Health Care: Little Guidance And Dubious Economics. Health Affairs. April 17, 2020.
- Ridgely MS. Does vertical integration improve or imperil U.S. Health Care? RAND Corp. Published November 16, 2021. Accessed June 4, 2022.
- Whaley CM, Arnold DR, Gross N, Jena AB. Physician Compensation In Physician-Owned And Hospital-Owned Practices. Health Aff (Millwood). 2021;40(12):1865-1874.
- Dafny L, Gruber J, Ody C. More insurers lower premiums: Evidence from initial pricing in the health insurance marketplaces. Am J Health Econ. 2015;1(1):53–81.
- The Commonwealth Fund. How has the Affordable Care Act affected health insurers’ financial performance? Issue Briefs. July 20, 2016. Accessed at https://www.commonwealthfund.org/publications/issue-briefs/2016/jul/how-has-affordable-care-act-affected-health-insurers-financial.
- The White House. Executive Order on Promoting Competition in the American Economy. July 9, 2021. Accessed at https://www.whitehouse.gov/briefing-room/presidential-actions/2021/07/09/executive-order-on-promoting-competition-in-the-american-economy/.
- Berenson RA. Addressing Health Care Market Consolidation and High Prices: The Role of the States. Urban Institute and UCSF Hastings Law San Francisco. Accessed 15 May 2022.
- LaVito A. CVS creates new health care giant as $69 billion merger with Aetna officially closes. CNBC. Nov. 28, 2018.
- Patient Support & Advocacy: CVS-Aetna merger. Accessed at https://www.ama-assn.org/delivering-care/patient-support-advocacy/cvs-aetna-merger.
- Morse S. FTC approves UnitedHealth Group $4.3 billion acquisition of DaVita, with conditions. Healthcare Finance News. Published June 21, 2019.
- Liss S. FTC sues to block 2 hospital mergers. Healthcare Dive. June 7, 2022. Accessed at https://www.healthcaredive.com/news/ftc-sues-block-hospital-mergers-utah-new-jersey/624866/.
- Report to the Congress: Chapter 15, Congressional request on health care provider consolidation. March 2020. Accessed at https://www.medpac.gov/wp-content/uploads/import_data/scrape_files/docs/default-source/reports/mar20_medpac_ch15_sec.pdf.
- Pollock JR, Hogan JS, Venkatesh AK, et al. Group Practice Size Consolidation in Emergency Medicine. Ann Emerg Med. 2022;79(1):2-6.
- Schmitz GR. Letter to FTC and U.S. DOJ Antitrust Division. April 20, 2022. Accessed at https://www.acep.org/globalassets/acep-response-to-ftc-and-doj-rfi-on-merger-guidelines-04.20.22.pdf.
- ACEP urges FTC to finalize ban on non-compete clauses in employment contracts. March 8, 2023. Accessed at https://www.emergencyphysicians.org/press-releases/2023/3-8-23-acep-urges-ftc-to-finalize-ban-on-non-compete-clauses-in-employment-contracts.
- Letter to U.S. Federal Trade Commission on Non-Compete Clause Rulemaking, Matter No. P201200. March 7, 2023. Accessed at https://www.acep.org/globalassets/new-pdfs/advocacy/acep-letter-on--ftc-noncompete-clause-03.07.23.pdf.