Compared with other developed nations, the United States spends far more on health care yet performs no better on many measures of health.1 Moreover, health care spending in the United States continues to outpace economic growth. By 2026, $1 of every $5 spent in the American economy will go toward health care.2 One of the main reasons Americans receive relatively little value from their health care dollars is that the price paid for care is higher—and that cost is rising more rapidly than those in other industrialized nations.3 Prices for medical care have generally risen faster than overall inflation, even for common procedures such as appendectomies and knee replacements.4 Any serious effort to bend the cost curve must address the prices Americans currently pay for health care, including the price markups that result from insufficient competition in U.S. health care markets. Put simply, less competition leads to higher prices for care.
Health care industry firms involved in merger activity often claim that consolidation will result in greater efficiency, lower costs, and more coordinated patient care. However, research shows that such efficiency often does not materialize; even when it does, savings are not passed on to consumers.
Economic theory indicates that when many similarly sized firms are present in a market, their competition for consumers keeps product prices low. Concentrated markets, those with just a few competitors or in which a small number of firms control most of the sales, generally have higher prices. In concentrated markets, firms wield market power and have control over prices and supply. In some cases, concentrated markets arise naturally. The population of a rural county, for example, may be too small to support more than one medical clinic. In other cases, market power can fuel concentration. Firms may drive out rivals by providing better care or lower prices; by developing loyalty to their brand; or by engaging in anti-competitive, unfair business practices. Another way markets can become concentrated over time is through consolidation, as competitors combine to form a single firm through mergers or acquisitions.
The U.S. health care system is riddled with highly concentrated markets, and consolidation is a major driving force. There are some key factors contributing to consolidation: Physicians’ practice groups have grown larger over time;5 three firms now account for two-thirds of pharmacy benefit management—the third-party administrators for prescription drug programs for insurers and other end payers; and more than half the pharmacy market is controlled by the top five firms.6Based on federal antitrust regulators’ standards, in 9 in 10 metropolitan areas, the hospital market is highly concentrated.7Health care industry watchers have noted that consolidation is picking up: The consultancy PricewaterhouseCoopers (PwC) declared that 2017 marked the “[r]esurgence of megadeals,” and the advisory firm Kaufman Hall declared it the year mergers and acquisitions “shook the healthcare landscape.”8
In addition to consolidation between like firms—hospitals acquiring other hospitals or pharmacy chains merging together—the health care sector is also experiencing increased vertical consolidation, that is, integration among companies that provide different sets of services.
The boom of vertical mergers starting in the mid-1990s was driven by hospitals and physician groups joining to form integrated provider systems.9 Today’s headline-making deals involve all facets of the health care sector. This fall, the U.S. Department of Justice (DOJ) and state regulators gave their blessing to the $69 billion merger between the insurer Aetna and CVS Health, whose business includes retail, health clinics, pharmacy services, and pharmacy benefits management.10 Among other recently announced vertical tie-ups are insurers such as Cigna and pharmacy benefit managers like Express Scripts and insurers and providers—United and DaVita. In addition to mergers, vertical integration also occurs as existing firms venture into new lines of business. A number of health system giants, including Partners HealthCare in Boston and the University of Pittsburgh Medical Center, run hospitals and offer insurance plans.11 More recently, a group of health systems have banded together to launch their own nonprofit generic drug supplier, Civica Rx, to secure lower prices and steadier supply for their hospitals in response to the growing market power of generics manufacturers.12 Even technology giants are wading into health care management. Google announced it is teaming up with insurer Oscar, and Amazon joined with Berkshire Hathaway and JPMorgan Chase & Co. to tackle health care costs.13
While examples of concentration in the health care sector are rife, this report focuses on health care providers, namely hospitals and physician practices, and the consequences of consolidation in that arena. In 2016, the United States spent $1.7 trillion on hospital care and physician and clinical services, which together accounted for more than half, or 52 percent, of the nation’s health expenditures that year.14 This report discusses how health care provider markets are becoming increasingly concentrated, as well as the implications for both payers and patients.