Although they gathered to discuss potential state innovations aimed at controlling health care costs in consolidated hospital markets, panelists at a September 8 University of Pennsylvania Leonard Davis Institute of Health Economics (LDI) virtual seminar agreed there was a low probability of achieving that goal any time soon.

Moderated by University of Pennsylvania Carey Law School Deputy Dean, Professor and LDI Senior Fellow Allison Hoffman, JD, the panelists were: Loren Adler, MS, Associate Director of the University of Southern California-Brookings Schaeffer Initiative for Health Policy and former Research Director of the Committee for a Responsible Federal Budget; Martin Gaynor, PhD, MA, Professor of Economics and Public Policy at Carnegie Mellon University and former Director of the Bureau of Economics at the US Federal Trade Commission (FTC); January Angeles, MPP, Managing Director of Bailit Health and former Director of Rhode Island’s Children’s Health Insurance Program (CHIP); and Natasha Murphy, MS, Director, Health Policy at the Center for American Progress, and former Public Policy and Regulatory Compliance Analyst at CareFirst BlueCross BlueShield in Maryland and the District of Columbia.

The participants acknowledged that there has been a flurry of hospital consolidations across the country in the last 15 years and that neither federal nor state governments have been able to significantly slow that trend or match the political lobbying that facilitates it. They noted that the trend of horizontal mergers has broadened to include vertical mergers as hospital conglomerates reach down to buy up dozens of primary care or specialty practices in their region.

Vertical Consolidation Loopholes

Loopholes in the regulations governing hospital consolidations enable hospitals to often pursue vertical merger activities ‘under the radar.’

“There would be value in better reporting of ‘small’ mergers with physician groups,” said Adler. “A hospital or private equity company that buys up 20 different orthopedic practices in an area is dealing with acquisitions that are each individually too small to trigger the reporting threshold for informing regulators. States could certainly change that and require those smaller acquisitions to be reported. But the states’ track record is pretty abysmal in actually following through and preventing abuses of market power.”

Numerous scientific studies have documented how massive health care provider consolidations almost always result in higher prices, while at the same time they have little effect on the quality of patient care. Another of their inherent effects is the suppression of market competition and the weakening of insurers’ price negotiation leverage in that same market.

Hoffman noted that between 1998 and 2021, mergers have reduced the number of U.S. hospitals 25% from 8,000 to 6,000. “Hospitals have become the number one employer of doctors, followed by insurers, followed by private equity,” she said.

Driving Force of Spending

Between 1970 and 2019, total US health spending grew from 7% to about 18% of the gross domestic product (GDP), over $4 trillion a year. “Decades of evidence generally points to price as the important driver of health care spending growth rather than increased use of care,” said Hoffman.

“It is a really, really big deal that we’ve had such a huge amount of consolidation in U.S. health care,” said Gaynor. “Things have gone so far that in most of these markets we can’t rely on competition anymore to keep prices and costs down or even to assure quality. I don’t think we want further consolidation—horizontal or vertical—that is harmful to patients, harmful to consumers, and harmful to workers. But the question we face now is how do we deal with these dominant systems that are already in place?”

Angeles pointed out that the COVID-19 pandemic complicated the situation further, making it more difficult to press for state action, or hospital changes or innovations in pricing. “For the last few years during the pandemic, hospitals were posting huge losses,” she said. “They were contending with labor shortages. And there was a national public sense of ‘do not touch hospitals because we need them and their essential workers.’ The hospitals were saying ‘we can’t take any more price cuts.’ I think that is starting to turn around as you start to see hospital systems return to profitability again. So, the tenor of cost control conversations is starting to also change.”

“I think some kind of price regulation is in order,” Gaynor said. “However, I think that’s unlikely to happen in most states or any time soon. So, we need to think about what we’re going to do while we’re waiting for that to happen. Even if we do implement price regulation in some places, that doesn’t mean we can then ignore promoting competition, because competition for patients in a market is important for assuring access, quality of care, and equity.”

State Cost Commissions

Murphy pointed out that one of the cost control strategies being explored by a handful of states is the creation of state health care cost commissions. The commissions can potentially use all the legal and regulatory tools of state government, including those that discourage further consolidation or overly high prices.

“Eight states have pursued cost commissions,” said Murphy. “I think the idea has really emerged as an attractive policy option due to the various cost contain strategies states have the authority to employ. One of the most common shared elements of the current eight states’ commissions is their ability to set a year-over-year cost growth benchmark. These targets serve as anchor points to better understand and fully track health care costs, make the data accessible, reviewable, and available to the public. This transparency can be incredibly powerful.”

Angeles, who has recently worked with all eight states, said that setting a growth target “in and of itself is not going to get you where you need to be—ultimately getting states and their partnering stakeholders to take action and implement initiatives that will drive spending down. What the target does is create transparency and some accountability for entities within that state that have a role in managing health care. A critical component that is often overlooked here is the robust data infrastructure needed to get transparency right,” she said.

Global Budgeting

Earlier this month, the Centers for Medicare and Medicaid Services (CMS) announced the launch of the new All-Payer Health Equity Approaches and Development (AHEAD) Model designed to provide financial incentives to encourage more experimentation at the state level of health care cost control. It is a variant of the all-payer/rate regulation model that funds hospitals with a pre-determined, fixed annual, or “global” budget based on a defined population’s expected level of service utilization.

“The idea is that paying hospitals in this global budgeting way instead of through fee for service would give them the incentives to manage care within a budget constraint,” said Angeles. “How will that play out in the future? I don’t know. I’m cautiously optimistic, but I am having a bit of a hard time seeing how CMS might get states beyond those that already have hospital global budgets—like Maryland, Vermont, and Pennsylvania—to apply for the program. It’s a big lift.”

Gaynor was somewhat less enthusiastic. “At one point there were quite a few states that had all payer rate regulation, and the evidence indicates it’s not clear how well it worked. In some states it looked like it worked kind of okay but in many other places it didn’t seem to work terribly well. That doesn’t mean we shouldn’t strongly consider and maybe advocate for price regulation or rate regulation or global budgets. But I think we do have to be aware that it’s not so easy to make work.”

State Public Option

Adler pointed to the public option—the creation of a state-run health insurance coverage program—as another potential fix. “The cat’s out of the bag in a certain sense with hospitals,” he said. “We already have very powerful health systems established and while it’s theoretically plausible to break them up, that doesn’t seem to be in the cards. But one oversight mechanism would be to say, ‘Let’s step in and effectively regulate prices.'”

“Seemingly the most common method for doing this is for your state to create a public option—a health insurance program run by the state— that sets the prices paid to providers in particular hospitals,” said Adler. “That could reduce the premiums of the public option and also, to the extent it is competitive with other plans, it could incentivize those plans to bring down premium prices.”

Gaynor agreed. “The public option has some real promise if states can implement that. They would want providers to feel compelled to contract with the public option and that’s where the state as purchaser can play a role. State governments are often the largest employers. They could say, ‘If you want to be in our plan, you must contract with the public option. That’s something that I think is worth considering. But in terms of potential success, the design matters just like with everything else.”

As the session ended, moderator Hoffman asked each of the four panelists to cite one innovative thing they would like to see implemented at the state level.

• Adler: “I’d like to see a state public option actually follow through on the hospital rate regulation piece. A number of states have set these premium targets so that if premiums aren’t growing faster or growing too fast, they can come in and adjust hospital prices.”
• Murphy: “I’d like to see a state that does have a cost commission actually jump into the CMS’ new Accountable Care Organization (ACO) Realizing Equity, Access, and Community Health (REACH ) Model just to see how that turns out.”
• Angeles: “I’d like to see more state insurance departments focused just on health similar to what Rhode Island has with its Office of the Health Insurance Commissioner that is just focused on health care. That way you could do more around rate regulation, rate review, and use more of the tools that we’ve already talked about.”
• Gaynor: “I’d like to see state price regulation, oversight, and review systems with teeth. We see that in a few places, but we need that more broadly. We need accurate data and consequences when problems are identified. And, as I just said, I like the public option idea. It’s something that has merit. Those are some things that I think could really have some legs for state health policy.”

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