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Steven Pearlstein

Consolidation: Health Care's Empty Promise

By Steven Pearlstein
Wednesday, January 12, 2005; Page E01

One of the hollow promises of the health care industry is that consolidation would benefit consumers.

Bigger insurance companies would have more clout to negotiate lower prices from hospitals, doctors and drug companies. And bigger hospital groups would realize administrative and operating efficiencies while having the scale to invest in cost-saving new technology.

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Alas, it hasn't happened. Prices for just about everything medical are continuing to rise faster than everything else, with little or no evidence of improvements in quality. Instead, our reward seems to be the creation of local and national oligopolies characterized by less competition, less choice, higher prices and higher returns to shareholders.

Two new studies published by Health Affairs, the bible of health policy, document the shortcomings of health industry consolidation.

James Robinson, a professor of health economics, calculates that the top three health insurance companies control two-thirds or more of the business in all but 14 states, with numbers reaching as high 92 percent in Maryland and 98 percent in the District and Northern Virginia.

Robinson juxtaposes those numbers with the 2000 to 2003 financial results of the top five national firms. He shows a decline in the percent of each premium dollar that goes to cover medical costs, along with an even stronger trend toward higher premiums, profit and stock prices. While this doesn't prove causality, it certainly raises serious questions about the consumer benefits of consolidation.

Alison Evans Cuellar, an economist at Columbia University, and Paul Gertler, a business professor at the University of California at Berkeley, have also weighed in with their study of hospital mergers two years out. It shows that costs increased, not decreased, that there was no improvement in basic quality measures such as mortality and adverse safety events, and that prices increased 7.7 percent for managed care customers and 4.1 percent for fee-for-service plans.

How do we explain these data?

In the case of hospital mergers, said Cuellar, administrative efficiencies wind up being small potatoes, puny, while efforts to realize operational efficiency often run into a stone wall of opposition from doctors uninterested in changing the way they practice. That was the undoing of the merger between Mount Sinai and New York University hospitals in New York, she said.

Meanwhile, the effort to gain negotiating leverage through mergers often proves to be an arms race with no winners. Insurance mergers beget hospital mergers, and vice versa, neutralizing any negotiating advantage.

Certainly one result of all this consolidation is that it has reduced the chance of a new entrant coming along to shake things up with a new technology or business model. In a world where giants deal only with giants, that's not likely.

Another source of competition has come from regional companies deciding to grow the old-fashioned way, moving into geographically adjacent markets to win new customers. But now that national insurers have gobbled up most of the regional players, there aren't many left. Think of UnitedHealth's purchase of MAMSI and Oxford in this region.

As for the newly merged hospital "systems," some -- like Inova Health System's nicely profitable "nonprofit" operation in Northern Virginia -- are now so dominant they have become somewhat immune to competitive pricing pressures.

Others have discovered that they so overpaid for recent acquisitions, or have become so stymied by integration issues, that they have neither the time nor money to leverage the benefits of size to install computerized record systems or introduce the kind of evidence-based medical practices that hold out the best promise for lowering costs and improving medical outcomes. In the few places where such innovations have taken hold, it turns out that management and culture are the key factors, not scale.

Maybe it just takes time for the benefits of consolidation to reach consumers. Until they do, let's shut down the merger machine.

Steven Pearlstein can be reached at pearlsteins@washpost.com.

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