Obamacare and the Consolidation Wave

I have witnessed how these changes impact price for services firsthand. CT scans for one private doctors’ group in Chicago were routinely done in the office of another private doctor in the same office building. The cost for three scans -- neck, chest, and abdomen -- were about $3,000. Of course, that is not how much the insurance company negotiated for the scans. That was more like $1,500. The private-physician group was acquired by a large teaching hospital. The next set of scans were performed inside the hospital by its radiology department. The price was $10,000. Again the insurance company paid about half the price (its negotiated rate).

Then one of the doctors bolted from the group to work at another hospital as a salaried employee. At the new hospital, the scans were also done in-house at the hospital. Now the price was almost $18,000, though the insurance company’s negotiated payment rate dropped to a third of the price, or about $6,000.  In essence, the new hospital did not have the leverage to get the same percentage of its price paid, so it charged a lot more than the teaching hospital.

In the past few weeks, a major insurance company revealed that several large and very prestigious teaching hospitals and their doctors would be excluded from their networks for some of the plans offered on the exchanges in Chicago.  Simply put, the providers had priced themselves out of part of the relevant market. Corporate insurance plans will likely continue to include the high-priced providers because their employees expect them to be in the plans.

There has also been a sharp increase this year in the number of hospital mergers and acquisitions, or horizontal integration. In a few cases, this has led to closure of excess capacity at some facilities after the merger or acquisition. This was the strategy of Rick Scott, now governor of Florida, when he ran the large  HCA Columbia hospital system years back. Today, the consolidation wave seems to have a different goal -- small providers may be unable to compete and may not have the data needed to negotiate effectively.  Large systems operating  in a market may offer enough locations and  “storefronts” that they control too large a share of the market to be excluded. And they are likely to have far more sophisticated data systems to enable them to set their prices. So far, antitrust enforcement in the hospital area has been a non-factor.

This first year of the exchanges will undoubtedly be a mixed bag. In some states, things may go relatively smoothly and there will be a reasonable number of alternative plans offered  at the various levels. In other states, there may be very few options. The prices for the various plans will also be very different from state to state, reflecting different local price structures for providers and utilization patterns (higher or lower volume). It is inevitable that many people who currently have insurance will wind up in new plans with new doctors. Selling Obamcare back in 2010 as if this were not going to happen was at best misleading, and probably worse. It is likely that the consolidation wave will exert upward pressure on provider pricing.

American health care had two big issues before Obamacare was passed: access issues for those  who were denied coverage due to pre-existing conditions, and high cost.  The access issue impacted a few million people at most. The high-cost issue impacted everyone.  The administration promised that health care reform would address both issues. They will likely find that the reforms they put in place will do more to improve access for those denied coverage than to achieve any progress on the far more comprehensive issue of health care costs -- both price and volume.

Also read "Your Future Under Obamacare: Big Medicine Getting Bigger" by Dr. Paul Hsieh.

Next week: "Is America Ready for Obamacare"?