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As more hospital systems consolidate, experts say health-care prices will jump

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By Julie Appleby
Kaiser Health News
Saturday, September 25, 2010; 6:20 PM

From their base in Baltimore, leaders of Johns Hopkins Medicine can see the future - and it's at the hospital down the road.

The world-class academic medical center is reaching deep into new territory, acquiring a hospital last year in suburban Maryland and awaiting approval to add Sibley Memorial in the District to its roster of hospitals and clinics.

The acquisitions are part of a wave - particularly in the mid-Atlantic region - of consolidations leading to fewer independent hospitals and doctors, a trend that many industry executives say will grow because of the health-care overhaul.

The action in the mid-Atlantic is being watched closely, with experts saying consolidation in other parts of the country has led to higher health-care prices - size is power, and commanding market share can give hospitals an edge in negotiations with insurers. That kind of leverage mirrors the advantage many big insurers have, which has prompted complaints from doctors and hospitals. Tensions between hospitals and insurers are running high as both face pressure to contain costs.

"All the evidence very clearly shows consolidation leads to higher prices," said Martin Gaynor, an economist at Carnegie Mellon. "Guess who pays for those higher prices? One might think insurers would eat them. No, they don't. It goes into higher premiums. When premiums go up, employers just pass them right on to their workers, either in the form of lower wages or reduced benefits."

The Federal Trade Commission found rapidly rising prices in markets after hospitals joined. For example, such steep increases followed the 2000 merger of two Chicago-area hospitals that in 2008 the FTC forced the two to negotiate with insurers separately.

That same year, the FTC filed a complaint over Fairfax County-based Inova Health System's plan to merge with Prince William Health System, including a hospital in Manassas. The commission said the deal would give Inova control of nearly three-quarters of the Northern Virginia market and probably drive up costs for employers, consumers and insurers. The two dropped their plans to merge shortly after, and the Prince William system eventually joined with North Carolina's Novant Health.

Hospital leaders from Baltimore to Seattle say the health law approved by Congress in March gives them even more reason to merge with or buy rivals, because of its emphasis on integrated systems where hospitals and doctors better coordinate care.

Also fueling the trend: More doctors want to be employed directly by hospitals, allowing them more job security without the hassles of running a business. But hiring groups of doctors can be an "expensive and daunting proposition" for a stand-alone facility, said Steven Thompson, senior vice president for Johns Hopkins Medicine.

Nationally and locally, he said, "it's fair to say that [independent] hospitals are talking with everyone, feeling that they don't want to be the last one standing."

Power over price

Hospitals point to the benefits of consolidation. Larger systems have an easier time getting capital for new services or equipment, such as electronic medical records. The e-records, they say, should save money over time through more efficient care and fewer medical errors.

Proponents say savings can be achieved through what the legislation calls "accountable care organizations," or ACOs. Rules governing ACOs are still being developed, but it is envisioned that they would include doctors, hospitals and other providers who would be paid by Medicare to cover all enrollees in a given service area. If the ACO meets quality and cost targets, its executives and doctors would share the expected savings and possibly receive bonuses.

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