Competition in healthcare will keep you healthier – and the recent decades of hospital megamergers have concentrated the market, making it less competitive, Austin Frakt has observed in the Feb. 11 New York Times.

“For many goods and services, Americans are comfortable with the idea that competition leads to lower prices and better quality. But we often think of healthcare as different – that it somehow shouldn’t be 'market based',” noted Frakt, who is the director of the Partnered Evidence-Based Policy Resource Center at the V.A. Boston Healthcare System, associate professor with Boston University’s School of Public Health, and adjunct associate professor with the Harvard T.H. Chan School of Public Health.

This observation flies in the face of common arguments in the industry that are in favor of mergers. “By harnessing economies of scale and scope, they’ve argued, larger organizations can offer better care at lower costs,” he stated, linking to a WSJ commentary by Kenneth L. Davis, in which the author stated, in 2014, that, “decades ago, hospital mergers set off alarm bells. Some worried that they would decrease competition and raise costs. Yet thanks to cataclysmic changes in the delivery of healthcare, hospital mergers now offer the potential for higher quality and more efficiency.”

According to Frakt, what the market research in healthcare really shows is that regardless of whether the industry is nationalized, as in the U.K., or not, “competition is a valuable tool that can drive healthcare toward greater value.”

His point is underscored by a number of studies, including the work on consolidation of Carnegie Mellon University economist Martin Gaynor, who, he noted, has stated that, “evidence from three decades of hospital mergers does not support the claim that consolidation improves quality.”

In fact, hospital consolidation even hurts care quality in markets in which prices are set by the government, like in the U.K.

Gaynor looked at the impact, for example, of the National Health Service policy that required that before getting hospital care patients got five hospital options – and quality data on each. The results showed that, “when prices are set by the government, hospitals don’t compete on price; they compete on quality,” Gaynor noted, according to Frakt.

Gaynor authored a study of the impact of that policy that revealed that for each drop of 10 percent in market concentration, one-month mortality figures for heart attacks fell three percent.

There are other studies that show similar findings for both the N.H.S., and for Medicare in the U.S., according to Frakt.

Nor is the impact limited to hospitals – a study in the journal Health Services Research from Thomas Koch of the Bureau of Economics at the Federal Trade Commission, and colleagues, looked at consolidation in physician market structure, specifically cardiology group practices, and found that, “an increase in consolidation leads to statistically and economically significant increases in negative health outcomes. For example, we find that moving from a zip code at the 25th percentile of cardiology market concentration to one at the 75th percentile would be associated with 5 to 7 percent increases in risk‐adjusted mortality for three of the sample populations. We also found higher expenditures in more concentrated markets.”

Hospital mergers are an ongoing trend. The 2017 total of 115, topped 2016's 102, according to an analysis released by management consulting and software provider, Kaufman, Hall & Associates.

“Providers are seeking partners for a number of reasons,” Anu Singh, managing director of Kaufman Hall, told HCB News in October, 2017. “One is to achieve economies necessary to lower total costs in the face of downward payment pressure. Another is to find partners with complementary capabilities necessary for a health care environment focused on managing population health across the continuum of care. In addition, partnerships can help with the intellectual and financial capital needed to develop innovative approaches to care, particularly outside the acute care core.”

But hospital mergers slowed in 2018, according to the research group. It reported that there had been a total of 90 announced deals and that it had found:

– The size of transacting parties continues to grow. The average size in revenue of sellers (defined as the smaller of two organizations in a transaction) has grown at a compound annual growth rate (CAGR) of 13.8 percent since 2008, reaching $409 million in 2018. This is the highest figure seen since Kaufman Hall began tracking this metric in 2008.

– The big are getting bigger. Seven transactions announced in 2018 involved sellers with net revenues of $1 billion or greater.

– The percentage of announced transactions involving financially distressed sellers continues to decline, down to 20 percent in 2018 from 21 percent in 2017.

– Not-for-profit systems remain active as acquirers. A not-for-profit system was the acquirer in 75 percent of transactions in 2018, tracking closely with the numbers from 2015 and 2016 (75 percent) and 2017 (76 percent). In 23 percent of deals, a not-for-profit acquired a for-profit, up from 16 percent in 2017.

– Consolidation in some states is moving faster than in others. Texas, with eight deals, saw the most transactions in 2018, followed by Florida (seven deals), Pennsylvania (six deals), and Louisiana and Tennessee (five deals each) .

– Texas and Florida led the way in terms of transacted revenue for announced deals in 2018. But distribution of revenue across deals differed significantly between the states. Transacted revenue in Texas is anchored largely by Baylor, Scott & White Health and Memorial Hermann Health System's planned merger. In Florida, transacted revenue is more evenly distributed across several deals, including those involving Boca Raton Regional Hospital, Martin Health System, and Health First.

– Sixteen states saw no announced transactions in 2018. These include states that in recent years have seen relatively high volumes of transactions (for example, Kentucky, with five transactions in 2017) or large deals (for example, Massachusetts, with one deal representing $5 billion in combined revenue announced in 2017).

Perhaps its key takeaway for hospitals, according to Ken Kaufman, chair of Kaufman Hall, is that, “hospitals used to compete with the hospital across town for inpatient business. Today, hospitals are struggling to hold onto large chunks of their outpatient business in the face of a new set of competitors that have scale and technological knowledge never before seen in healthcare.”