Provider Network Consolidation: Does it Help or Hurt Payers

In 2015, four of the big five health insurers announced plans to merge that would have consolidated the payer landscape to three behemoths. They cited the need to gain reach, shore up weaknesses, and prepare for consolidation among other stakeholders. Although the mergers never saw the light of day (the US Department of Justice antitrust division sued to block them, and federal judges ruled in the DOJ’s favor), they signaled a trend that would only accelerate. 

As Anthony Morreale, PharmD, assistant chief consultant for clinical pharmacy services and health services research, Department of Veterans Affairs told First Report Managed Care at the time, “It’s capitalism at work. If there is room for efficiencies and market grab, these companies are going to seize that.” 

Two years later, market forces are leading to consolidation among health systems and provider practices—the very thing that payers claim necessitated their need to get bigger. CMS’s MACRA alternative payment models (APMs) encourage mergers so that health systems and practices can absorb the administrative burden that APMs create. Payers maintain that the resulting consolidation is contributing to rising health care costs as competition in many areas dwindles. America’s Health Insurance Plans (AHIP) cites a number of studies it says prove the point. Other research suggests that payers often have the power to keep costs in check as a result of consolidated negotiations and regional influence.  

We asked AHIP to amplify its position, spoke with a researcher who looked at how costs are impacted in highly concentrated markets, and turned to our experts to analyze the current landscape. 

AHIP’s Position Is Clear

AHIP’s position is not complicated. “The bottom line is health care costs continue to rise for consumers,” Cathryn Donaldson, AHIP’s communications director, said in an interview. “Health plans work hard to negotiate with providers and ensure care remains affordable, but it’s clear that consolidated hospital systems ultimately hurt patients and drive up costs.”  

AHIP says it believes the best remedy is competition, “which is essential to eliminating price variation and protecting patients from soaring price increases.” In that vein, AHIP supports CMS’s efforts to create ways for small group practices to participate in APMs in an effort to increase competition.  

Some argue that consolidation is inevitable given the current landscape. The experts we spoke with tended to agree. Still, AHIP is pushing back hard to ensure that such consolidation does not go too far, and Ms Donaldson says it is committed to doing its part to keep costs in check. 

“First, plans will continue to negotiate with providers and develop networks that focus on quality and affordability,” she said. “Second, plans will continue to pursue value-based partnerships with providers to enhance care coordination, improve the patient experience, deliver more efficient care, and impact health outcomes. Third, plans continue to engage with their members to ensure they are delivering and increasing patient satisfaction.”

As for research showing that payers often possess the wherewithal to keep price increases in check, Ms Donaldson notes that while that may be true to an extent, the reality is that prices still go up. 

“Consolidated hospital systems have stronger bargaining power to drive up prices, giving them the ability to negotiate prices that are significantly higher than what Medicare pays for the same exact services,” she said. “That’s simple economics.”

Hannah T Neprash, PhD, assistant professor in the division of health policy and management at the University of Minnesota’s School of Public Health, said that “it seems reasonable to expect that the relative bargaining power of both actors can affect the negotiated outcome. But…the challenge is that lower negotiated prices only benefit consumers if insurers pass some of the savings through to them.”

Higher Prices, Similar Utilization

In a study published in JAMA Internal Medicine, Dr Neprash and colleagues found that higher spending in consolidated markets was driven primarily by price increases, not change in utilization. 

If that is the case, does it stand to reason that as APMs and consolidation take further hold, utilization will change, and impact spending for the better? 

“Providers increasingly cite the ability to better coordinate care and reduce duplicative services as an impetus for merging,” she explained. “If these productive efficiencies materialize, they have the potential to offset the increase in market power generated by consolidation. But if consolidation and utilization continue to show little relationship, this may be a warning sign for antitrust enforcers.”

Dr Neprash went on to acknowledge that—just as water seeks its level—provider consolidation is inevitable. 

“Prevailing wisdom assumes that payment reform will accelerate consolidation, as providers position themselves to bear financial risk for the full continuum of patient care,” she said. “However, we find little evidence that providers have consolidated to enter alternative payment models.” 

She pointed to a recent study in Health Affairs which she and her team looked at CMS accountable care organization (ACO) programs and provider consolidation and found little connection between consolidation and ACO participation. 

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‘Defensive’ Consolidation

“If anything, we found some evidence of defensive consolidation” in response to new APMs, Dr Neprash said. 

F Randy Vogenberg, PhD, RPh, principal at the Institute for Integrated Healthcare told us he thinks it is next to impossible to determine who is responsible for soaring medical costs—and who stands to come out ahead. 

“The system is broken and there are so many variables that contribute to the dysfunction,” he said. “It is difficult to determine winners and losers. What we do know is that patients face increased out-of-pocket costs and questionable quality of care compared to most other advanced nations.”

Additionally, he explained that even the most elegantly-performed research does not prove definitively what drives prices skyward. “It’s all theoretical extrapolation, and a matter of perspective.” 

When asked how payers should gird themselves in the face of further health system and provider consolidation, Dr Vogenberg reiterated that the landscape is too complex to know for sure. 

“The question is more about what type of consolidation is of value and to whom.” he asked. “Right now, consolidation doesn’t seem to have helped the system, nor has it bolstered the case of third party payers who have also provided little to no value in managing care trends—especially cost.”

A Silver Lining for Some Payers

Regardless, Gary Owens, MD, president of Gary Owens Associates, said that he sees provider consolidation as an inevitable trend—even absent MACRA’s influence. And he believes it is driving up costs.

“Payers will not be able to avert this trend in any meaningful way,” he said. “They will wind up dealing with large systems of care in most regions of the country, except for some rural areas.”  

He added that there is a silver lining for payers operating in regions where there are competing and overlapping large systems. Insurers can “limit networks to one or two systems of care—thus forcing the negotiations in a more competitive direction.” However, he noted “such an approach can negatively impact network access issues and lead to possible poor geographic distribution of care.”

Dr Owens explained that with payer consolidation moving in the same direction (albeit in a more limited fashion now that the DOJ has weighed in), negotiations are “ultimately going to be between two 500 lb. gorillas in most areas.” Against such a backdrop, “Payers will need to continue to forge strong alliances with their preferred networks and be willing at times to threaten or actually drop a system from their network.” 

The fallout from such an approach is that “patients are caught in the middle and may suffer continuity of care issues.”

Dr Owens also suggested that payers continue to shift payment mechanisms. 

“Risk sharing, outcomes based payments, and bundled payments will become more of the norm as fee-for-service payments will becomes unsustainable when unit costs increase due to consolidation. In the end, the large systems [will] have much or most of the risk. The payer role will change to one of enrolling members and paying claims.”

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