1. Trends and Potential Implications of Increased Provider Concentration of Market Power for Cost and Quality Robert Murray, Global Health Payment, LLC Massachusetts Association of Health Plans Annual Health Policy Conference November 15, 2013 RMurray@GlobalHealthPayment.Com 1 Provider Consolidation

2. Topics to Cover Catalyst for Payment Reform (CPR)– Background & Study Two Phases of Provider Consolidation Findings: No surprise - Consolidation highly correlated with Price increases Recent trends mask underlying implications of consolidation Prices are still the primary drivers of health care cost growth Profound economic and social implications if it continues Possible solutions Final Thoughts 2

3. Paper Commissioned by Catalyst for Payment Reform (CPR) CPR formed in 2009 Independent non-profit led by health care purchasers Identifying & coordinating workable solutions to improve how we pay for health care Mission to accelerate reforms to promote the IOM’s 6 aims Creating a national framework for payment reform along with tools that catalyze change & align public/private strategies 3 http://www.catalyzepaymentreform.org/uploads/Market_Power_Paper.pdf Co-Author Suzanne Delbanco:

4. Background and Professional Interest in this Topic Currently a health care consultant – assisting State Governments, hospitals and private insurers in developing population-based and shared savings arrangements Focus on the development of Global Budgets for hospitals and employed physicians Also assisting the Chinese MoH in their consideration of prospective payment approaches (DRGs/Global Budgets) Professionally – always had an interest in the issue of consolidation and provider pricing Executive Director of the Maryland Health Services Cost Review Hospital Rate Commission for 17 years – monitored from afar 4 RMurray@GlobalHealthPayment.Com

5. 5 Hospitals nationally Mark up their charges 200% above cost Watching US hospital Charges with “shock and awe” Source: American Hospital Association statistics 1980 - 2009 US MD MD Hospital Markups Are the lowest in the Nation by far

6. Two Phases of Hospital Consolidation First phase 1990s – early 2000 period Literature assessing impacts of this phase available in the late 1990s and early 2000s Consolidation measured by use of a statistical measure (Herfindahl- Hirshmann Index “ HHI” ) Sum of squared market shares Increases as markets more concentrated among a small number of firms Reaches Max value of 10,000 when monopoly has 100% share 6 From M. Gaynor, Testimony before House Ways and Means, September 9, 2011 (source data AHA) for MSAs > 3 million population FTC/DOJ threshold For a “highly concentrated” Market is an HIIs > 2500 By 1997, Major MSAs were well above 2500

7. 7 Tracking the First Phase of Provider Consolidation Phase I may have been response to the Growth of “Managed Care” 1995 – 2002 RWJF: Health Care Synthesis Report: How has consolidation affected the price and quality of health care William Vogt and Robert Town, 2006 FTC considers a HHI to be “highly concentrated”

8. By 2009 – Most Markets “Highly Concentrated” 8 Taken from Capps and Dranove 2011. AHIP Presentation (Bates-White)

9. Some variation but Most MSAs are Concentrated 9 Taken from Capps and Dranove 2011. AHIP Presentation (Bates-White) 10% of MSA Had only One Dominant Health System

10. Consolidation Trends 1990 - 2006 10 Consolidation Trends: change in HHIs 1990 vs. 2006. Taken from Gaynor M. 2011. Testimony before House Subcommittee on Health. Shows MSAs by HII score In 1990 and same MSA in 2006 (1)While MSAs are highly Concentrated, there is wide variation (2) Most MSAs in 2006 were Highly Concentrated (250 of the 332) > 2500 (3) Increase in concentration is clearly a broad phenomenon Particularly striking Is the number of moderately Concentrated MSAs in 1990 that became “highly” concentrated by 2006 In 1990, this MSA Had an HII of 2200 But in 2006 its HII was 8000

11. Reasons Associated with this First Phase of Consolidation Most common reason (anecdotal and supported by some literature) links to the rise of managed care 1990s Natural economic response by hospitals to more aggressive negotiating ability of health plans with credible threats to shift volume 11 HMO Penetration MSA Hospital Mergers

12. Framing the Problem Why do we care?: Per capita health care spending has been twice that of most OECD countries; 18% of GDP; unsustainable growth, yada yada Some realizations Early 2000s – growing evidence that Unit Prices were a major factor differentiating the U.S. from other OECD countries Trend in Health Care charges and pricing correlated with increases in Provider Consolidation (over 1,000 mergers since the mid 90s) Hospital mergers have led to price increase of 3.5 – 53% Higher prices lead to higher insurance premiums and excess cost growth Anti-trust activity has failed to curtail consolidation (string of cases lost) 12 Health Affairs Journal May/June 2003 M. Gaynor

13. It’s the Prices! 13 What Accounts for the Difference between U.S. and German Spending on Health Care Offset each other McKinsey Global Institute: Decomposition of spending Germany vs. U.S. (taken from Reinhardt U.E. 2012. Journal of Economics) It’s the Prices

14. Literature on the Impact of Consolidation (1990-2006) Overwhelming evidence consolidation drives up health care expenditures (numerous studies) Also finding that consolidation contributes to wide variation in pricing both across markets and with in markets Some evidence consolidation results in improved provider efficiency Evidence that consolidation has either a neutral or negative on quality In theory, consolidation (particularly between hospitals and physicians) can result in improved clinical integration It appears, consolidation is not for better care management it is to enhance Market Power under a predominant FFS system 14 No evidence increased efficiency passed on to consumers For some diagnoses, consolidation found to reduce quality Research on physician-hospital consolidation doesn’t support this conclusion

15. Considerable FTC/DOJ Activity in 1990s - 2000 High and growing levels of concentration resulted in FTC anti-trust action during this period Anti-trust activity can often “draw a line in the sand” with successful individual cases and forestall additional merger activity Unfortunately the FTC experienced a string of high profile losses in the 1990s and into the next decade (1993-1998) Failure of anti-trust really represented the failure of the Judiciary – that believed that non-profit hospitals would behave differently Evidence shows that non-profit firms (despite community participation on boards) pursue aggressive anti-competitive tactics 15 (many successes in 80s and early 90s)

16. Phase II: Factors Driving Consolidation Uncertainty about the direction of health care reform Respond to calls for coordinated and integrated care (although again - research doesn’t indicate much improvement here historically) Future market dynamics seem daunting to smaller hospitals and physician practices Stand-alone hospitals lost profitability during recession and were offering themselves up to larger chains Again, a primary driver: attempt to obtain increased negotiating leverage/revenue More recently – mergers directed at increasing referrals to tertiary facilities from community hospitals and through acquired physician practices 16 and forestalling other competitive threats - many taking advantage of the lack of ACO monitoring and oversight

17. Other Factors and Tactics Help Drive up Prices Must “Have Hospitals” and “Must Have” specialty services So-called “Tying” of services & anti-competitive clauses in contracts Multi-hospital systems over large regions (avoid anti-trust scrutiny) but able to negotiate broad price increases for all facilities Relative geographic isolation – particularly in large spread-out geographic areas (Phoenix, AZ) Acquisition of physician practices by hospitals – to increase negotiating leverage for both groups, forestall possible competition by physician- organizations and generate additional “facility fees” These factors tend to be “mutually reinforcing and present, from a health plan perspective, a daunting challenge” Yet Health Plans often don’t push back, looking to be “just better than the Competition.” 17 Berenson, et al. Health Affairs May 2012 Seeing “Most Favored Nation” clauses in contracts

18. 18 Second Phase Appears to be Occurring since 2009 Since 2009, perhaps in response to uncertainty related to Health Care Reform, safe-harbor protections of the ACA and low cost of capital and distressed standalone hospitals – consolidation is now in a second Phase Source: New York Times September 2013

19. And Yet, Health Care Costs are Finally Under Control! “Growth in U.S. health spending was slow in 2010 at 3.9%” US health spending growth in 2009 - 2011 were the lowest in the 51-year history of tracking National Health Expenditures “the tectonic plates underlying the health system are beginning to shift in anticipation of new incentives under health reform” The Wall Street Journal: The Myth of Runaway Health Spending Slower cost growth could be due to economic factors and high deductibles yet, Medicare is also experiencing slower growth 19 Centers for Medicare and Medicaid Services, January 9, 2012 Karen Davis, Commonwealth Fund, January 18, 2012 J.D. Klein, American Enterprise Institute, February 17, 2012 “ The moderation has been driven by cumulative improvements in medical care and by insurers, and by marketplace disciplines on the demand for medical care. Consumers are finally getting more involved in managing and paying for their own care.” (really?)

20. Need a Longer-Term Perspective on Health Costs National Health Expenditures (NHE) = GDP +2% “excess cost growth” Trend line for NHE appears to be declining We haven’t reduced “Excess cost growth” and prices are primary driver 20 Source: CMS Office of the Actuary 2012 & U. Reinhardt Economix Blog - The New York Times Excess Cost Growth still Appears to be 1.5 to 2.5% But so is GDP Trend line

21. Evidence shows Expenditures track Economic Cycle Victor Fuchs and other economists are skeptical as to whether recent trends represent a long term structural shift in health care Analysis that adjusts GDP growth for the historical gap between GDP growth and Health Expenditure growth – shows there is a strong correlation between how fast Health Expenditures grow and the economic cycle 21 Except during the Managed Care Era Source: NEJM, Victor Fuchs September 2013 National Health Expenditures Adjusted GDP Growth (+2.4%) Kinda looks like a correlation to me !

22. Two Data Points don’t Indicate a Long Term Trend Historically, two year trends aren’t good predictors of long term growth And, the fundamentals of health care that drive up costs are still in place: Prevalence of Fee-for-Service payment arrangements Fixed-rate payment systems that pay providers marginal revenues > marginal costs and provide strong incentives to increase service volumes Fragmented and conflicting payment structures and incentives Highly consolidated provider industry (and getting more so) that has tremendous pricing power vs. private payers Disengaged business community that doesn’t hold private insurers accountable Insufficient Anti-trust review and oversight of contracting process 22 There is actually a negative correlation between the 2-year trend and long term 20 year that followed Source: NEJM, Victor Fuchs September 2013

23. Sad History of Health Reform in One Chart Tempting to view more recent favorable trends as a sign we’ve “broken the back of the health care cost monster” But we’ve seen this dynamic before “no approach our nation has tried to control costs has had a lasting impact” – Drew Altman 23 Or Too soon to break out the Champagne and celebrate? 1965 enactment Medicare/Medicaid Wage/Price Controls “Voluntary” Effort vs. Carter All-Payer Proposal Medicare IPPS Managed Care Broken The Back Of the Health Care Inflation Monster? Point: Policy-makers shouldn’t get lulled into a sense of complacency

24. It’s Still “the Prices Stupid” – at least for now During this period of slower growth in health expenditures, prices are the main contributor to increases in cost and insurance premiums Also, emerging evidence that in addition to causing a one-time increase in market prices in a particular area increased concentration appears to have a long term upward influence on long-term growth trends Retrospective studies also show that mergers in already highly concentrated markets generally lead to significant price increases (RWJF synthesis study 2012) Recent estimate from Price-Waterhouse that hospital prices will increase at 8.3% for 2013 much more than in any other sector of the health care industry 24

25. Despite Slowing of Health Care Cost Growth – Prices are still Primary Drivers 25 Massachusetts Spending Growth by Cost- Driver Category (2007-2008 and 2008-2009) Factors Accounting for Growth in Personal Health Care Spending, 1980- 2009 Martin A, Lassman D, Whittle L, Catlin A. Recession contributes to slowest annual rate of increase in health spending in five decades. Health Aff (Milbank) 2011;30(1): 11- 22. Schoenman, J.A., N. Chockley. 2012. Understanding U.S. Health Care Spending. National Institute for Health Care Management (NICHM) Webinar. February 2, 2012. Available from: Their analysis showed that “prices accounted for more than 60% of the increase in overall spending in 2010” “prices to explain nearly all of the increase in expenditures”

26. Hospital Prices increase continue to be Well Above Inflation 26 Growth in Prices Paid by Private Payer for Hospital Inpatient Care vs. Growth in the Hospital Market Basket Index 1992-2010 Sommers AC, White, Ginsburg PB. Addressing hospital pricing leverage through regulation: state rate setting. NIHCR Policy Analysis No. 9, 2012. Hospital prices consistently outstripping cost inflation a Functional Market for hospital services Hospital prices consistently outstripping cost inflation a Functional Market for hospital services Does NOT equal a

27. Hospitals Buying up Physician Practices 27 Taken from Gaynor, Statement before the Committee on Ways and Means, Health Subcommittee. Washington DC. September 9, 2011. “Hospitals are trying to wrap themselves in a physician employment blanket, but the cost per square inch of that blanket is very high. This is an effort to lock up the game before it even starts (i.e., preclude Physician-led ACOs and other market-based approaches, incentivize docs based on billings and increase negotiating leverage with payers” Anonymous CEO Major Maryland Hospital System

28. Recent Challenge of Hospital-Physician Consolidation Hospital acquisition or affiliation with physician groups and employment – are the most active area of consolidation recently There are strong and direct effects on prices Hospitals negotiate much higher prices for services of employed physicians The generate the addition of a “facility fee” Estimated to be costing Medicare in excess of $1 billion per year Indications of higher prices as well There are obstacles to insurers beyond just prices increases Obstacles to insurers’ steering patients to higher value providers Discourages the development of physician organizations Reduced potential competition in ACO/risk contracting market 28

29. Employers believe they foot the bill for nearly 60% of individuals enrolled in employer sponsored insurance plans (21% of spending) Tax deductibility of health insurance and other factors hide the fact that employees and consumers actually foot the bill for increased spending on health care – through near zero real wage growth, layoffs, increases in product prices and increased premiums and cost-sharing In tight job markets (such as recently) there is an even more profound impact as employers just resort to increased “cost-sharing” with employees (High deductible health plans) Average person must devote 25% of any new income to funding health care costs – with continued excess growth this could grow to 50-100% of any new income (Chernew &Baicker NEJM 2010) 29 Implications: For Employees and Consumers

30. Spending 18%+ of GDP crowds out needed investment in infrastructure, education and defense (hospital spending > Social Security and Defense spending now) “We don’t have an overall spending problem in the U.S. We have a humongous health spending problem” (Blinder, Wall Street Journal 2011) If health care costs continue to increase 1-2% above GDP – limited options for funding this and huge trade-offs in funding other programs “This collision [between increased spending and inability to raise taxes] cannot be avoided by borrowing. U.S. currently at 70-75% Debt to GDP Health care spending also a significant drag on long-term economic growth because it may help drive interest rates much higher Real concern is we have no more “economic space” to weather another financial crisis (and we’ve had two in the past 12 years) 30 Implications for the Economy

31. Per Economic theory, Monopolies are suboptimal because they charge higher than competitively established prices and when the prices get too high consumers “forego” purchasing the monopoly good (negative welfare) These output reducing effects are greatly lessened in health care markets because of the presence of U.S. Style Health Insurance Insured Consumers can now more easily pay the monopolist asking prices rather than being induced to give these services up The presence (or expansion) of health insurance is clearly a net positive for our society, however, health insurance can expand the negative resource allocation effects of provider monopolies This dynamic could create considerable strain on the continuation of subsidized insurance products 31 Other Objectionable Effects of Health Care Monopolies B. Richman, Duke University Law School August 2013

32. A Word about Political Power of Providers Another regressive aspect of Monopolies is the economic harm inflicted by spending heavily to sustain current monopoly barriers Richard Posner and others believe that monopolies’ most serious misallocative effect is the monopolists’ strenuous efforts to obtain, defend and extend market power Providers in major markets also wield tremendous political power because they are among the largest employers and source of new jobs Arguments of providers being “engines of economic growth” are false Recent RAND study quantifies increase in “excess health spending” results in job losses (121,00 for every 0.1% above GDP growth) From these data the author calculated that we sacrifice 1.2 jobs in the rest of the economy for every job added to the health sector At best a “wildly inefficient jobs program” (Baicker & Chandra NEJM) 32

33. Affordability Concerns and a Possible two-tiered Health System Real danger that current and planned Government spending cuts may precipitate further consolidation and higher prices to the private sector May lead to a diminishment of access and increasing lack of affordability of private insurance Will the <65 middle class increasingly be left out of the system? 33 Source: American Hospital Association Chart Book 2011 Middle Class ? Payments as a Percentage of Hospital Cost

34. CPR Study looked at Three Categories of Potential Solutions 34 Market-Based Approaches Coordinated Public-Private Approaches Regulatory Approaches

35. Potential Solutions – Many are being tried in Massachusetts Better information on Price and Quality for Consumers Most opportunities are on Outpatient Procedures/tests Inpatient services are generally too complex Price transparency can lead to increased prices (suppliers collude) Limited and Tiered Networks Higher receptivity to narrow network (affordability challenges) Exchanges create new opportunities here Hospitals can block tiered networks by refusing to contract Reference Pricing Provides strong incentive for patient to use reference price provider Applies mostly to discrete OP procedures so limited impact 35

36. Potential Solutions (continued) Fostering Physician-led Organizations Attempts to increase price-sensitivity of physician groups – to create a “rational purchaser” of better value for patients Helps create more competition among hospitals Examples in Massachusetts and other States (Maryland PCMH SSP program) Physicians-led shared savings program – but for total cost of care Significant potential for savings by shifting site of care (as shown by AQC) Government Actions Prohibit anti-competitive contracting practices (tying, anti-steering, MFN) Price Limits in certain key areas or revert to all-payer rate setting Neutron bomb: 36 Force AT&T style divestiture of Larger Health Systems

37. Out of Network Price Gouging by Providers The problem now is the huge and growing imbalance in negotiating leverage between providers and insurers An answer of how to restore that balance a bit can be found in a recent MedPac analysis (June Report to Congress 2013) Realization that private payer negotiating leverage also weak because of dominant providers ability to get exorbitant payments for out-of- network patients they see through their ER Insurers often presented with an option – either accept my demand for in-network prices that are 135% of cost now or pay me 300-400% mark up on prices for the 20-30% of your patients I see through my ED This problem is exacerbated as hospitals continue to increase their charge levels and also as Emergency Rooms are an increasing source of admissions 37

38. Faustian Bargain Facing Insurers In a negotiation a hospital can negotiate a contract and be assured of more volume (both ED volume/elective referral volume), albeit at a lower rate (135 % of cost) Conversely the hospital can remain out-of-network and charge all of the insurer’s patients admitted through its ED - full charges. The table shows that the revenue it will receive in either scenario is about equal And as a hospital increases its charges from 320 percent to 400 percent of cost the negotiating leverage shifts even more in its direction, as is shown in column G. 38

39. Potential Anti-Price Gouging Legislation – Needed Now Evidence from MedPac shows that this is NOT the case for Medicare Advantage plans however – MA plans are able to negotiate rates that are close to Medicare FFS levels This is because MA Plans have a “back-stop” – if they can’t get a provider to negotiate reasonable rates, the back-stop is the MA plan pays Medicare FFS rates This provides very strong evidence for the need for legislation to set a limit on out-of-network prices paid – particular for ED cases This is being studied in California where this problem is quite significant – and continues to undermine the negotiating leverage of insurers State legislatures should pass a law limiting these out-of-network “balance billing” strategies to 1.5 x Medicare or less 39 Amazing! Why would this be?

40. Regulatory Efforts to Tie PMPM growth to GSP Massachusetts’ attempt to overtly target GSP growth as the desired limit on Health Expenditure growth is laudable Unfortunately, it is largely a voluntary exercise The All-payer rate setting system in Maryland is attempting to do precisely this After years of favorable cost per case growth, but highly unfavorable growth in hospital service volumes – Maryland is establishing strict limitations on volume growth and mostly PM PM (global budget) payment arrangements for most hospitals Maryland has proposed an all-payer PMPM limitation for both all- payer and Medicare hospital expenditures (both IP and OP) 40 (i.e. it is not Enforceable in the way a legislative mandated rate system could both establish payment incentives for and enforce this result)

41. Proposed Maryland All-Payer Demonstration Place all or most hospitals under Global Budget constraints Several Years ago we used our rate setting authority to establish enforceable Global Budgets with 10 rural hospitals and expanded its Volume limitations – with the idea of expanding over time The Commission has now developed a methodology to extend this approach to other hospitals Hospitals that remain under the core DRG-based IP and FFS-based OP rate system – will much face stricter volume controls in the rate system These policy changes in addition to the Commission’s rate setting authority (applied at the individual hospital level) are designed to limit total hospital revenue growth to = 3.58% growth per resident per year over the next 5 years This system will apply to all-payers (including Medicare) and could have profound implications for cost containment in the U.S. 41 And it is enforceable

42. An Outsiders View of Massachusetts As an outsider, recognize that there is much for Massachusetts to be proud of – many advantages and tremendous insight and progress Massachusetts AG’s report – was the “Gold Standard” for clear, insightful and courageous analysis on these issues The Legislature has taken some very important steps with major provisions re: price transparency, required use of tiered networks, a system of performance review and a desired link of TME growth and GSP However, the so-called “lower cost health systems” that were thought to be competitive threat to the big monopolies are now struggling From what I read and hear – affiliations and mergers continue in the state without much resistance 42

43. Close with An Observation and a Question Indicated earlier – felt a little embarrassed coming to Boston to purportedly discuss a topic that you already have analyzed and know so much about Massachusetts led the nation in insurance reform and expansion and also was a leader in analyzing and taking some preliminary steps to address the very seriously negative implications of Provider Consolidation in health care You have the evidence, you know better than anyone what will happen We don’t have a health care spending problem – we have a “humungous” Consolidation problem with prodigious implications for future spending Rate Regulation may well be back in vogue in the near future 43 Why then in god’s green earth is this merger activity allowed to continue?