Obamacare and the Consolidation Wave

This is part of a series of articles on the rollout of Obamacare and how the law will change our health care system. Each Wednesday in September, we will publish two articles — one on the changes in medicine and medical care and one on changes in the insurance industry. We hope this series of articles will help you make better decisions when it comes to your health care and how you buy insurance.



Two of the promises made by President Obama and Democrats in Congress when Obamacare was being legislated and voted on related to whether Americans could keep their existing health insurance if they already had a policy, and whether they could continue to see their current doctors once the health care reform program was fully implemented.

The president went so far as to offer a guarantee:

Here is a guarantee that I’ve made. If you have insurance that you like, then you will be able to keep that insurance. If you’ve got a doctor that you like, you will be able to keep your doctor. Nobody is trying to change what works in the system. We are trying to change what doesn’t work in the system.

The selling of the new program was designed to reassure Americans that little would change for the vast majority of people in the country and that for those for whom things would change, it would only be for the better — the expansion of Medicaid for lower-income people and the promise of subsidized health insurance that could not be denied to anyone with somewhat higher income levels (up to four times the poverty rate income level).

As the October 1 deadline approaches, beginning the period when states are supposed to open their exchanges that will provide various health insurance options for individuals and small businesses, those promises are beginning to ring hollow.

Depending on the plan you choose in the Marketplace, you may be able to keep your current doctor. Most health insurance plans offered in the marketplace have networks of hospitals, doctors, specialists, pharmacies , and other health care providers. Networks include health care providers that the plan contracts with to take care of the plan’s members. Depending on the type of policy you buy, care may be covered only when you get it from a network provider.

When comparing plans in the Marketplace, you will see a link to a list of providers in each plan’s network. If staying with your current doctors is important to you, check to see if they are included before choosing a plan.


There are millions of Americans who currently have health insurance policies as individuals or families, outside of any government-run program (Medicare, Medicaid) or corporation-provided plan. The new exchanges will be a marketplace not only for those not now covered, but for those already with coverage in this market.

One of the reasons why new plans may not include a person’s individual doctors or the hospitals that were in one’s original plan is that the insurance company that provides the current policy  may have been unsuccessful negotiating rates with these providers that would enable them to compete successfully on price within the guidelines of the four types of plans — bronze, silver, gold, and platinum — that will be offered in the exchanges. These four types of plans  offer various percentages of plan costs that have to come back as health benefits, ranging from 60% to 90%. A 60% plan, the bronze option, will cost far less than a platinum plan, which  provides 90% of plan cost as benefits.

The benefits provided by any insurance plan cover specific services at specific prices. The prices will always be negotiated between the insurance company and the providers, and the benefits — the covered services for the new plans offered on the exchanges — have been defined by the Department of Health and Human Services. The variable will be the volume of each service that is provided, which, for now, rests with the providers — the doctors who treat patients, admit them to hospitals, and order tests and procedures. There is very little in Obamacare that addresses this fee-for-service system.


Insurance companies have data on physician-ordering patterns and hospital costs, including lengths of stay for admitted persons and readmission rates. So estimates can be made about whether some doctors will be more costly than others, based solely on the likely volume of procedures and tests and the negotiated prices. The decision by an insurance company to exclude a doctor or a hospital from its network will be largely based on price and volume history, assuming no quality issues have emerged.  So, too,  insurance companies will decide whether to compete at all on a particular state’s exchanges and, if they do, in which categories of plans. The evidence so far is that in some states there will be new insurance providers competing; in other states, existing insurers are leaving this market.

In the nearly four years since Obamacare was passed, providers have not been sitting around waiting for the new regulations and implementation date. To gain leverage in the negotiation with insurance companies operating on the exchanges, providers have been bulking up — seeking to gain enough market share in individual markets so that it will be difficult for insurers to exclude them. A big part of this trend has been vertical integration — the purchase by providers of private-physician practices, making the doctors salaried employees of the hospital. This trend was already in place before Obamacare was passed, but the new law accelerated the process. In exchange for a salary and staff costs paid by the hospital, and billing and price negotiation becoming the responsibility of the hospital, doctors would now admit all of their patients to one hospital, and all of their ancillary activity, including  radiology and laboratory, would be conducted in hospital departments.


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”?



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