Better Solutions for Healthcare

KFF: What We Know About Provider Consolidation

By Karyn Schwartz, Eric Lopez, Matthew Rae, Tricia Neuman

September 2, 2020

The COVID-19 pandemic has led to dramatic decreases in health care spending, as patients and providers have delayed a wide range of health care services. The decrease in service use and spending resulted in a decline in revenue for many providers at the same time that some are facing increased costs due to the pandemic. Given the uncertain timing of a “return to normal” and potentially lingering effects of the current economic crisis, some providers may continue to experience sustained declines in revenue even with the federal assistance that has been made available.1

Depending on the severity and duration of revenue loss, some hospitals and physician practices may find it difficult to operate independently, which could increase the rate of consolidation among health care providers. Lower margins among some providers may create new opportunities for large chains to acquire smaller providers. The Coronavirus Aid, Relief, and Economic Security (CARES) Act and the Paycheck Protection Program and Health Care Enhancement Act allocated $175 billion for grants to providers that were partly intended to help make up for revenue lost due to coronavirus, but analysis shows that the first $50 billion in grants were not targeted to providers most vulnerable to revenue losses.2 Another $13 billion was subsequently targeted to safety net hospitals and $11 billion has been targeted to rural providers.3 However, it is not clear whether this infusion of funds plus other government loans—including those from the Paycheck Protection Program—will be sufficient to stabilize providers who are least equipped to weather this revenue decline. Even if sufficient government assistance is provided, the disruption of the COVID-19 pandemic may make operating independently seem less attractive and riskier to some smaller providers. Therefore, financial assistance to providers may not be sufficient to prevent an increase in the pace of consolidation.

This brief provides an overview of existing research that examines the impact of provider consolidation on health care costs and quality. There are two major types of consolidation among health care providers, both of which are discussed in this brief. The first is horizontal consolidation, which occurs when two providers performing similar functions join, such as when two hospitals merge or groups of physician practices merge to form larger group practices. The second type is vertical integration, which refers to one type of entity purchasing another in the supply chain such as hospitals acquiring physician practices.4

Provider consolidation leads to higher prices

A wide body of research has shown that provider consolidation leads to higher health care prices for private insurance; this is true for both horizontal and vertical consolidation. In Medicare, payment policies protect Medicare from increased prices due to horizontal consolidation but have led to higher Medicare costs in the case of vertical consolidation. However, recent administrative and legislative changes are bringing Medicare reimbursement at hospital outpatient departments in line with reimbursement at independent physicians’ offices.