By Maanasa Kona and Sabrina Corlette

Employer-sponsored insurance (ESI) provides critical coverage for 160 million Americans. However, the generosity of many of these plans is in decline, leaving many workers and their families with high out-of-pocket costs, relative to their income. Employers acting alone will not be able to reverse this decline. Policy change is needed, but assessing what policies will work is challenging. In this series for CHIRblog, we assess proposed policy options designed to improve the affordability of ESI, the state of the evidence supporting or refuting the proposed policy change, and opportunities for adoption. In the first of the series, we reviewed the primary drivers of the erosion occurring in ESI and identified three recognized policy options to improve affordability: regulating prices, reducing anti-competitive behavior, and improving price transparency. The second in our series assessed the evidence for direct and indirect regulation of provider prices and options for policymakers. This post, the third our series, explores policy options to limit provider consolidation and anti-competitive behavior.

As we discussed in the first part of this series, high and rising prices of health care are a driving factor in the declining offer rates among employers and the increases in enrollee cost-sharing in ESI plans. A significant contributor to these rising prices is consolidation in health care provider markets, which hands large health systems outsized leverage when negotiating prices with insurers or third-party administrators working on behalf of employers. As this negotiating power increases, the prices these health systems set become more and more decoupled from the actual costs of providing services.

The Extent of the Consolidation Problem and its Documented Effects on Prices

For years, the health care market has been experiencing significant consolidation, and the COVID-19 pandemic has only accelerated this trend. Between 1998 and 2021, there were more than 1800 hospital mergers reducing the number of hospitals in the country from 8000 to 6000. One study found that prices at monopoly hospitals tend to be 12 percent higher than at hospitals that have 4 or more competitors; hospitals that have recently merged with another hospital within a five-mile radius have raised their prices by about six percent. Another study found that hospitals that are part of a health system charge a stunning 31 percent more for services than hospitals that are not part of a larger system.

Beyond hospital mergers, health system acquisition of physician practices is also on the rise and a cause for concern. According to American Medical Association data, the percentage of physicians employed in practices at least partly owned by a hospital increased from 16 percent in 2008 to about 40 percent in 2020. A systematic review of 15 studies on the effects of such vertical integration found that these kinds of acquisitions can significantly increase health care prices. One of these studies finds that the patients of a vertically integrated physician pay about six percent more than patients of independent physicians while experiencing no improvement in the quality of their care. In fact, one study even found an increase in post-procedure complications for patients who are treated by vertically integrated physicians. Beyond causing increases in unit prices, vertically integrated physicians can also inflate overall health care costs by referring their patients to pricier hospital-based imaging and outpatient departments instead of more affordable freestanding imaging facilities and ambulatory surgical centers. Additionally, physician groups that have been acquired by hospitals and health systems often start adding on outpatient facility fees on top of their professional service fee.

Policy Strategies to Curb Provider Consolidation

What is the Federal Government Doing About Provider Consolidation?

The Federal Trade Commission (FTC) and U.S. Department of Justice share the responsibility for enforcing antitrust laws at the federal level. The FTC in particular has recently expressed increased interest in ramping up oversight over health care providers. In 2020, the FTC ordered six insurance companies to submit data that will help the FTC study the impact of hospital and physician group mergers on prices and health outcomes. In 2022, following President Biden’s executive order supporting the enforcement of antitrust laws to prevent consolidation and anticompetitive behavior in health care markets, the FTC successfully blocked four hospital mergers.

Despite these increased efforts, significant gaps remain in FTC’s oversight over hospital mergers. Generally speaking, the FTC has attempted to block only about one percent of mergers in the health care market. Aside from resource constraints, there are a few reasons that the FTC’s oversight is so limited. First, FTC is only notified about hospital mergers that have a value of $101 million or higher. Ninety percent of private equity takeovers or investments fall below this threshold. Second, FTC is prohibited from enforcing antitrust laws against any non-profit hospitals, which make up about 45 percent of the hospitals in the country. Third, FTC’s current guidelines only focus on mergers within one geographic region, excluding cross-market mergers, which made up more than half the mergers in the last 10 years. Early in 2022, the FTC and  the Department of Justice launched a joint public inquiry to update its general merger guidelines (not specific to hospital mergers), and it remains to be seen whether they will update the hospital merger guidelines to include cross-market deals.

Fourth, the FTC has limited ability to act in states that have “Certificate of Public Advantage” or COPA laws that effectively immunize hospital mergers from federal antitrust laws and replace them with (often cursory) state oversight. Studies of past COPAs have found that they have resulted in increases of commercial inpatient prices and declines in quality of care. There is also emerging evidence that Clinically Integrated Network or CINs, where a group of health care providers contract with one another to reach certain quality and cost goals without officially merging, can result in the same price increases as mergers but fly “under-the-radar” in terms of triggering antitrust oversight.

What Can States Do About Provider Consolidation?

States could follow the FTC’s lead and increase their own oversight of provider consolidation. A recent study found that states with stronger antitrust laws were more likely to scrutinize hospital mergers. The study identifies eight states with strong laws including Oregon, which recently enacted legislation to establish “the most comprehensive health care merger review processes in the country.” Oregon’s merger review authority allows it to scrutinize proposed deals that would otherwise fall below the FTC’s $101 million threshold. However, the study noted that having strong antitrust laws, while necessary, is ultimately insufficient, given that even in states with strong laws, most challenged mergers eventually succeeded.

Nineteen states currently have COPA laws in place, while five states have repealed their COPA laws. The remaining nineteen states could repeal their COPA laws and allow federal antitrust enforcement to oversee a higher proportion of mergers than they currently do. Short of repealing COPA laws, state regulators in charge of processing COPA applications could scrutinize applicants more strictly. Recently in New York, a COPA application fell through seemingly because the merged entity would have had a combined share of nearly two-thirds of the commercially insured inpatient services in one county.

States also potentially have the authority to review provider mergers through their community benefit requirements for nonprofit hospitals and certificate of need (CON) laws, which require hospitals to obtain state approval before establishing or expanding their services. However, leveraging CON laws can be a double-edged sword because these laws have also been criticized at times for stifling completion by serving as a barrier to market entry.

Policy Strategies to Promote Competition

Anticompetitive contract clauses

While increasing scrutiny over mergers and acquisitions is important, experts at a Bipartisan Policy Center panel on taming health care prices noted that it might be too late for some markets that have already undergone significant consolidation. In these markets, it is important to restrict hospitals that have already amassed significant negotiating leverage from using that leverage to push for anti-competitive contractual language. Experts have identified six different types of contract clauses that have the potential to increase health care prices, five of which favor providers:

• Gag clauses prohibit insurers or employers contracting with a provider from releasing provider-specific price or quality information. Congress enacted the Consolidated Appropriations Act in 2020 banning gag clauses across all states.
• Non-compete clauses block physician employees from competing with their employer for a certain amount of time within a certain geographic area.
• All-or-nothing clauses require insurers to contract with all facilities within a health system if they want to include any one facility in the system.
• Anti-tiering/steering clauses require insurers to place any facility or physician associated with the health system in the most preferred or lowest cost-sharing tier and prohibits insurers from implementing value-based insurance design to steer patients away from these providers.
• Exclusive contracting clauses prohibit insurers from contracting with any competing providers.

While the majority of states have some restrictions on non-compete clauses, very few states currently have laws in place to restrict all-or nothing, anti-tiering/steering, or exclusive contracting clauses. However, insurers, employer groups and state attorneys general have had some success challenging these anticompetitive clauses in court. For example, a trust providing employee benefits to unions, a group of self-funded employers and the California AG successfully reached a settlement requiring the large health care system Sutter Health to cease the use of all-or-nothing contract clauses and anticompetitive bundling of services.

Insurers and third-party administrators acting on behalf of employers can use a state’s strong stance against anti-competitive language as leverage during negotiations with large health systems to drive down prices. However, there is some evidence that dominant health systems might be able to skirt such bans by either only extracting the agreement orally or, by say, requiring only a minimal difference in cost-sharing to get around any anti-tiering clause prohibitions. Experts find that states might be better off combining restrictions against anti-competitive contract clauses with enhanced provider rate review processes that give the state the ability to review insurer-provider contracts to ensure they are not anticompetitive. For example, Rhode Island gives its insurance commissioner the authority to review insurer-provider contracts and reject those that result in unreasonable price increases.

Certificate of Need (CON) Laws

About half the states currently have CON laws in place, which require hospitals to acquire the state’s approval before starting or expanding a new service. There is some disagreement among experts on whether these policies promote or inhibit competition. Critics of CON laws blame them for creating barriers to market entry for new participants, but there are conflicting studies on the matter. Some show that CON laws have reduced the number of available providers, and other show that they have enhanced competition by “limiting excessive expansion by incumbents.” States with CON laws and high levels of market consolidation could potentially repurpose them to curb anticompetitive behavior by strong incumbents and to monitor merger activity while limiting their impact on new market entrants.

Looking Forward

In a review of the three main policy options to curb health care costs—price regulation, promoting competition, and improving price transparency—the Congressional Budget Office ranked efforts to prohibit consolidation and improve competition as having a more modest impact than price regulation. They project that policies promoting competition are likely to have a “small impact” on health care prices—about one to three percent in the first 10 years with the potential for more savings after 10 years, because it can take time for these efforts to show results. It is hard to put the toothpaste back in the tube when it comes to market consolidation in the health care sector. As mentioned above, a lot of markets are already heavily consolidated, and price regulation remains the most promising path to curbing health care prices. However, for some markets, it is not too late to beef up the review of mergers, and in all markets, regulators can continue to be vigilant about anticompetitive contracting while finding ways to keep the door open to new entrants. Preventing consolidation and improving competition remain important tools in the toolkit for policymakers looking to curb rising health care costs.