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Health Affairs Editor-in-Chief Alan Weil interviews Brent Fulton from the University of California Berkeley on his recent paper on the rise of cross-market hospital systems and their US market power.
Each week, Health Affairs' Rob Lott brings you in-depth conversations with leading researchers and influencers shaping the big ideas in health policy and the health care industry.
A Health Podyssey goes beyond the pages of the health policy journal Health Affairs to tell stories behind the research and share policy implications. Learn how academics and economists frame their research questions and journey to the intersection of health, health care, and policy. Health policy nerds rejoice! This podcast is for you.
00;00;00;02 - 00;00;27;12
Alan Weil
Hello and welcome to “A Health Podyssey”. I'm your host, Alan Weil. It’s well known in the health policy community that hospitals have gone through an era of consolidation. Hospitals that used to be independent are joining up with others to create hospital systems. In many metropolitan areas, all of the hospitals are owned by one, two or maybe three different organizations.
00;00;28;04 - 00;01;01;18
Alan Weil
Yet one type of consolidation has received less attention, and that is consolidation across markets: hospitals operating in different markets with the same owner. The dynamics of cross-market consolidation and its implications are different than within-market consolidation. Cross-market hospital consolidation is the topic of today's episode of “A Health Podyssey”. I'm here with Brent Fulton, Associate Research Professor of Health, Economics and Policy in the School of Public Health at the University of California, Berkeley.
00;01;02;18 - 00;01;27;12
Alan Weil
Dr. Fulton and coauthors published a paper in the November 2022 issue of Health Affairs, examining hospital consolidation that spans markets. They found that in the past 20 years, the share of hospitals that have become part of a hospital system rose from 10% to 67%, and there was also a significant increase in the percentage of systems that operated across markets.
00;01;27;25 - 00;01;34;06
Alan Weil
We'll discuss these findings in more detail in today's episode. Dr. Fulton, welcome to the program.
00;01;35;08 - 00;02;06;10
Brent Fulton
Thank you, Alan. I'm very excited to be here because as you know, there's a heated debate occurring in the United States about competition policy. So we're really in a period of flux and a lot of it's being driven by concerns about monopoly power within big tech. But the changes to competition policy that will address that sector will also affect health care competition and the way it's assessed.
00;02;06;28 - 00;02;19;24
Brent Fulton
So my coauthors and I are very happy that our paper is being discussed on today's podcast. And I'd like to thank Arnold Ventures for providing financial support to make this research possible.
00;02;20;19 - 00;02;42;05
Alan Weil
Well, I'm really glad to have you as a guest toda, and I agree with you. This question of how do we really sustain competitive markets is getting a lot of attention. In the area of health care, I hear people quite familiar with the notion that hospitals are consolidating and there are concerns about that because they feel it puts upward price on pressures.
00;02;42;22 - 00;03;06;12
Alan Weil
The unique contribution, not the only one, but a unique contribution of your work is to focus on cross-market, particularly this notion of a hospital system that reaches into different geographic areas. Now, at first thought, when you think about competition, it's hard to see why that's relevant. These are markets. They're not competing with each other. People aren't choosing among them.
00;03;06;20 - 00;03;14;20
Alan Weil
So why does it even matter if a hospital system has a reach across different geographic areas?
00;03;15;09 - 00;03;46;26
Brent Fulton
First, let me define a market in two ways. I'm going to talk about a market from the patient's perspective for hospital services, but then the relevant market perspective to look at from a cross-market perspective is from the insurer’s perspective. So how does the FTC or the DOJ define a market? So they asked two basic questions. First, they ask What is the product or service that we're talking about?
00;03;46;26 - 00;04;10;25
Brent Fulton
So for hospital care, one of the most common services is maternity care. And so the second question they ask is, well, what are the hospitals geographically competing for those services? And so I really want to be specific here because I think it helps to have an example. So I'm going to hone in on San Francisco, the city of San Francisco.
00;04;11;09 - 00;04;38;01
Brent Fulton
It's 47 square miles. It's seven miles by seven miles. It's a pretty tight geographic area. And one hospital in that geographic area is Saint Francis Memorial Hospital. So it's a 300 bed hospital that's just north of the financial district. It offers maternity services. So what are the hospitals in that same geography competing? Well, there's the Sutter Hospital Systems,
00;04;38;01 - 00;05;11;06
Brent Fulton
they have California Pacific Medical Center, there is UCSF, there's also Kaiser. So each of them compete for maternity services. So that's within a market. So now we're going to ask from the insurers’ perspective, what is the market they consider. Insurers in the United States, there's essentially six main insurers that provide employer-sponsored insurance. Those insurers are national in scope.
00;05;11;18 - 00;05;36;28
Brent Fulton
And so when you think about Saint Francis Memorial Hospital in San Francisco, how is it linked to a hospital in Denver, Colorado? So the hospital in Denver, Colorado that I'm going to be talking about is Porter Adventist Hospital. It's in Denver. It's a 368-bed hospital. It also offers maternity services. So from the patient's perspective, those hospitals are across markets.
00;05;36;28 - 00;06;09;20
Brent Fulton
But from the payers perspective of, let’s say, United, they offer insurance to employers in the Denver market and the San Francisco market, the Wal-Marts of the world, the FedExes of the world, Home Depot and so forth. When they're now negotiating for hospital services, those two hospitals are part of CommonSpirit, one of the largest, if you will, cross market mergers that have occurred in the United States was in 2019, Dignity Health, which is owned
00;06;09;20 - 00;06;36;01
Brent Fulton
Saint Francis Memorial Hospital. They own about 40 hospitals in California, Arizona and Nevada merged with Catholic Health Initiatives, headquartered in Colorado. And they have hospitals in 14 states, mainly in the Midwest and the South. So completely across markets from the patient's perspective, but from United's perspective, they’re within the same negotiating geographic market.
00;06;36;28 - 00;07;05;07
Alan Weil
So what I hear you saying is that the definition of the market isn't really the consumer, the individual patient when it comes to health insurance, because these insurers have a single contract with the entire system. And so the fact that these two hospitals in totally separate locations are part of the same system actually does affect their ability to negotiate with the insurer.
00;07;05;15 - 00;07;06;26
Alan Weil
Is that how it works?
00;07;06;26 - 00;07;30;03
Brent Fulton
Yes, it's a mix. There are some hospital systems that negotiate as one entity. There are other hospital systems that break it apart at the state level. And then even on the insurer side, they're not necessarily negotiating all in one major contract, but over time it's evolving towards that.
00;07;30;03 - 00;07;50;19
Alan Weil
Okay. So I really get your point here. There's not one model of negotiation, but from the perspective of competitive markets, what I do hear you saying is that there are implications for competition when there's joint ownership across geographies, even if patients don't travel across those geographies.
00;07;50;23 - 00;08;19;25
Brent Fulton
That's correct, because if you're United Health Care, you're trying to develop a provider network that's attractive to Wal-Mart, to the Home Depots, and FedExes of the world that have employees across all these markets. When hospital systems merge and grow larger and larger, there's fewer alternatives. Can you really exclude CommonSpirit Health from your network? How many other alternatives?
00;08;19;25 - 00;08;29;28
Brent Fulton
There's Ascension. There's Community Health Systems. There are alternatives, but the number of alternatives keeps going down and then that is not good for competition.
00;08;30;20 - 00;08;54;22
Alan Weil
Okay. So in the introduction, I gave some data on overall hospitals becoming parts of systems, but your work focused on hospitals across geographies, across markets. So what can you tell me from your research about trends in hospitals becoming parts of systems and the way those systems come into being?
00;08;55;26 - 00;09;20;16
Brent Fulton
Yeah, as you said in the introduction, if you dial back 50 years to 1970, about 10% of hospitals were part of hospital systems and you fast forward to today, it's about two thirds and the increase has been glacial, about one percentage point a year. It hasn't been a steep increase in the last ten years. It's been increasing over time.
00;09;21;01 - 00;09;53;26
Brent Fulton
And what's interesting about these hospital systems, they're not uniform. There's about a half a dozen systems with over 100 hospitals. These are your HCAs, CommonSpirit, Ascensions of the world. And then there's another ten or so systems between 40 and 50 hospitals. This trend has been occurring the last 50 years and it's mixed. Sometimes it’s the hospital system acquiring one or two hospitals, but now we're seeing a lot more hospital systems joining one another.
00;09;55;16 - 00;10;31;29
Alan Weil
Okay. So we're in a world of consolidation in these different dimensions. I want to ask you a little bit about why this matters and what we should do about it. We'll talk about those topics after we take a short break. And we're back, I'm speaking with Dr. Brant Fulton about the rise of cross market hospital consolidation in hospital systems in the United States.
00;10;32;12 - 00;10;58;00
Alan Weil
Thus far, we've really been describing the phenomenon, but I want to go to the implications here. Again, when we think about a local market, the concern is always that if the hospitals are too consolidated, they can drive up prices and there's some significant evidence to suggest that's what they do. It seems like, given the conversation we've had, that's also a risk when you have cross-market consolidation.
00;10;58;15 - 00;11;19;29
Alan Weil
But I suspect it's a little more complicated than that, and I suspect also that just like hospitals argue that there are benefits to within-market consolidation, they probably argue there benefits to cross-market consolidation. Can you give me a little bit of a feel of why it matters that there is increasing consolidation and what some of the possible costs and benefits are?
00;11;20;12 - 00;11;48;04
Brent Fulton
When you have consolidation, in the way the FTC or the DOJ reviews health care mergers is they look at what are the pro-competitive aspects of the consolidation, what are the anti-competitive aspects, and then they weigh those. And then ultimately a court might be the one who decides, does this harm competition on net? And so hospitals are struggling.
00;11;48;05 - 00;12;25;09
Brent Fulton
We have sort of a bimodal distribution. There are a number of hospitals that, especially in rural areas that are in financial troubles, they don't have the capital to invest and electronic medical records, care management processes, disease registries and the like. So merging with an urban system that has the capital and best practices can be very pro-competitive. It can reduce costs, it can improve quality and it can maintain access, particularly in rural areas.
00;12;25;09 - 00;12;52;21
Brent Fulton
But on the anti-competitive side, is so are those cost savings then going to be passed on to the employer or the individual purchasing the insurance or are they going to be captured by the hospital? And so a number of studies and I'm going to talk about within-market concentration for a moment or within-market mergers, have shown that these mergers result in price increases between 6 and 12,
00;12;52;21 - 00;13;18;15
Brent Fulton
and sometimes if they're very concentrated, up to 50% price increases. And so even if there are savings, oftentimes they're not passed on to the consumer. If you look across markets, there are very few studies that have been done. Only two in the peer reviewed literature. But what those studies have found are price increases due to the cross-market merger.
00;13;18;15 - 00;13;43;05
Brent Fulton
And the theory behind this is, if you have United, a common payer, if you recall, in the Denver market, as well as the San Francisco market, if CommonSpirit creates a network hole in one market and then is able to create a network hole in another market, and as these network holes increase, the cost to the insurer becomes higher and higher.
00;13;43;12 - 00;14;16;10
Brent Fulton
And so they're going to eventually capitulate. They're going to pay higher prices in order to maintain the network that's going to be receptive to the Wal-Marts of the world, the Home Depots to the world and so forth. That being said, the health insurers are very consolidated. As I mentioned, there's about six in the employer market across the country. So when the FTC and the DOJ are reviewing health care mergers, they look at how consolidated the buyers of the services are.
00;14;16;27 - 00;14;45;04
Alan Weil
So this is a really complicated picture, as I'm listening to you. So first of all, there may be efficiencies created, but what you're saying is that from a competition perspective, what matters is not just are they created, but who benefits from them. And that's complicated by the fact that, as you say, we have consolidated purchasers and I hear this all the time from providers who say, we're just consolidating because the payers are consolidated and if we don't consolidate they'll use their leverage and squeeze us too tight.
00;14;45;04 - 00;15;11;06
Alan Weil
And I suppose that could have lots of negative consequences as well. And the FTC and the DOJ are supposed to sort of take this all and look at it and figure out yes or no. Is this pro or anti-competitive? One of the things I was struck by in your paper and I had never thought about this before, is that the standard tools often used to analyze competition really have a geographic flavor to them, at least in health care.
00;15;11;06 - 00;15;33;27
Alan Weil
You know, we hear about market concentration and we certainly think about, as you said earlier on, the geographic area where the competition is occurring. So how does antitrust scrutiny even work when you're looking at whether a system that has a hospital in San Francisco should merge with a system with a hospital in Colorado? Like what are the metrics?
00;15;33;27 - 00;15;34;25
Alan Weil
What are the tools?
00;15;35;10 - 00;16;06;01
Brent Fulton
Thankfully, the courts have recognized in health care that negotiations for hospital services occur in these two broad stages. At the first stage, the insurers are negotiating with the hospitals to create a network, and then in that second stage, the patients are selecting an insurance company, and then within the hospitals within that network, they're selecting the hospitals that they're going to seek services from.
00;16;06;01 - 00;16;29;10
Brent Fulton
So the courts have recognized this. The FTC is yet to bring a case because there isn't enough evidence. I don't think to date that is strong enough. That shows the preponderance of evidence that this is the anticompetitive and it's going to depend on the particular merger. It's not going to be a one size fits all.
00;16;29;25 - 00;16;56;00
Alan Weil
So one role that your work performs is to simply give us a taxonomy and an enumeration of the extent of this cross-market consolidation so that we can start building an evidence base one way or the other. And I'm sure it won't be definitive about what the consequences are and what I think I hear you say is that you can't really expect the regulators to object to these until there's an evidence base that there are anti-competitive effects.
00;16;56;04 - 00;17;03;09
Alan Weil
So in the absence of an evidence base, they sort of wait for the evidence to arise. It seems a little late for solving this problem.
00;17;03;29 - 00;17;38;23
Brent Fulton
Yes, but particularly the current FTC, they are, I think, willing to take some chances that they'll challenge a merger. And so they don't have to completely wait for the evidence, because sometimes in challenging the merger, they're able to subpoena evidence that we aren't privy to. And so they can illuminate evidence that shows the anti-competitive effects better than we can with the data that we have available to us.
00;17;38;23 - 00;18;09;11
Alan Weil
So those of us in health care tend to think that it's the only thing that matters in the world, but as you pointed out, a lot of the concerns about consolidation arise from the technology sector. Are there lessons from the approach to regulating that sector or thinking about how to measure competitive forces, anti-competitive forces in that sector or other sectors that we could use as a template for having a more appropriate regulatory structure for health care?
00;18;09;17 - 00;18;48;10
Brent Fulton
Yes, I think what the FTC and the DOJ, they're currently revising the horizontal merger guidelines, along with the vertical merger guidelines. And what's already come out of the current tenure of the current FTC is the way vertical integration is being looked at, and in the hospital context, this is when a hospital purchases a physician organization. Historically, it's been viewed as positive that instead of having two firms trying to maximize profits, it's better to have one firm maximize profits.
00;18;48;14 - 00;19;13;23
Brent Fulton
It doesn't sound like it would be, but it actually is. It benefits the consumer and so forth. But what the FTC is more looking at, particularly within health care, is the possibility of foreclosure. And so what I mean by that is if a hospital purchases a physician organization, let's say it's primary care, and those physicians historically have been referring patients to myriad hospitals,
00;19;13;23 - 00;19;37;13
Brent Fulton
and now the referral pattern is more towards a hospital that they're under the ownership of, that can decrease competition. And so that's one area that the FTC and I think out of these merger guidelines, you're going to see that vertical integration is not going to have an easy of a pass. It's going to be scrutinized a little bit more.
00;19;37;29 - 00;19;58;29
Alan Weil
And yet, as I listen to you talk about cross-market, I'm not sure if that's horizontal or vertical, right. It's not vertical in the sense of a hospital buying a physician practice. But it's not exactly horizontal because it's not two hospitals in the same geographic market merging. So is there sort of a third way to analyze these or am I?
00;19;59;00 - 00;20;04;09
Alan Weil
I don't know. How do they think about something that isn't exactly horizontal, exactly vertical?
00;20;04;27 - 00;20;36;24
Brent Fulton
The area that your earlier question about big tech and the way it might shape antitrust within health care. And I think if we step back to what's happening in health care, so if you look at health care expenditures in any given year and you array people from the people who spent the least all the way to the most, you can go through half the population and they only account for between three and 5% of expenditures.
00;20;37;08 - 00;20;58;04
Brent Fulton
You go all the way up to the 95th percentile, that top 5%, they account for about 50% of expenditures each year. And so for the mantra that's been in health care for the last 30 or 40 years is we got to move off of fee-for- service, put more risk on the providers. But would you want to manage that risk, those 5%?
00;20;58;13 - 00;21;23;05
Brent Fulton
It's not like they hold up a sign or something. You know, some of them you can predict with pretty good certainty, but many you cannot. And so that risk is likely going to be managed by Big Tech. They're already moving in. How this then relates to the FTC's concern is they're concerned about Big Tech and their monopolization of data.
00;21;24;08 - 00;21;52;13
Brent Fulton
And there's a quality concern, you know, being a consumer that how is our data being used? How is it being protected? You can think of that in a quality dimension. And then from a market power dimension is, as we know in health care, that we might find in innovation, we might find something. There's cost savings while it's captured by the hospital or no, it's captured by the insurance group or over in pharma it’s captured by the PBM.
00;21;52;13 - 00;22;09;12
Brent Fulton
So the concern is that if there is better predictive analytics to manage care to reduce the expenditures that the top 5%, is that going to be captured by the data analytics groups and Big Tech?
00;22;09;26 - 00;22;33;13
Alan Weil
Wow. Well, I think we're going to have to have a whole separate podcast discussion about this, because what I think I'm hearing you say is that in health care, we tend to focus on the market being health care services, but there's this whole other market, which is the market of health care data, and the two are closely related, but they're not the same.
00;22;33;27 - 00;23;01;28
Alan Weil
And if we apply pro-competitive principles to only one of them and don't have a competitive market in the other, we could find ourselves sort of, if you will, solving for the wrong problem or solving half the problem, or I don't know what the right way to characterize it is, but that there really is-- There really are independent markets for information and for health care services.
00;23;02;25 - 00;23;03;25
Alan Weil
Am I hearing you right?
00;23;03;26 - 00;23;40;00
Brent Fulton
Yes. You're hearing me exactly right. And that's a good way to describe it. These markets, then interact with one another, because in order to provide health care services where your care is being managed really well, where preventive services are being targeted to the right population, the predictive analytics are so important and in order to provide the highest quality care at a reasonable cost, those predictive analytics are becoming more and more important because we have the ability to do this now with machine learning models, more data, better computing power.
00;23;41;06 - 00;24;02;20
Alan Weil
Well, you've really opened my eyes with the research and then this conversation. I as I say, I think most people who are worried about market consolidation in health care focus on geographic markets. You've given me a sense of the importance of looking across markets. Now you've given me another sense about the importance of looking at data in addition to services.
00;24;02;20 - 00;24;14;03
Alan Weil
It sounds like there's a lot more to study here and a lot more to understand. So, Dr. Fulton, thank you for the work, the conversation and for being my guest today on “A Health Podyssey”.
00;24;14;03 - 00;24;16;03
Brent Fulton
Yeah, thank you, Alan. It's been my pleasure.
00;24;16;25 - 00;24;21;02
Alan Weil
Thanks for listening. If you enjoyed today's episode, I hope you'll tell a friend
00;24;21;04 - 00;24;29;16
Alan Weil
about “A Health Podyssey”