Rising cost is a key challenge in health care, and this week Lancaster County’s largest hospital network responded by joining forces with a bigger, Philadelphia-based network. Experts, however, say consolidation may not be the right answer.
“You need to have scale to be cost-effective in the way you deliver care,” Lancaster General Health president and CEO Tom Beeman said Tuesday, announcing the merger with Penn Medicine.
The Penn system, which is composed of the University of Pennsylvania Health System and the Perelman School of Medicine, has annual revenues of about $4.9 billion — roughly five times as large as the Lancaster system’s $1 billion.
No cash will change hands in the deal but there will be greater clinical integration. LG Health will retain local control over most issues and there will continue to be separate financial statements and accounting departments. With the exception of a couple of seats on each board, management structures will remain unchanged. LG Health spokesman John Lines said this week that none of the executives have contracts that stipulate payments upon the occurrence of a deal like this one.
The systems, both nonprofits, don’t expect opposition from regulators at the Federal Trade Commission or the Pennsylvania Attorney General’s office. Lancaster and Philadelphia are about 75 miles apart.
The local consolidation is only echoing what has been happening nationally as healthcare services providers actively take advantage of opportunities to consolidate. However, the preponderance of research says in the past, health care consolidation has led to increased costs, not lowered ones — even when adjusted for improvements in the quality of care.
No forced consolidation
That said, the industry has been changing, and providers commonly cite the Affordable Care Act and payment reforms that are moving away from fee-for-service and toward population health management as impetus for the flood of mergers and acquisitions in the past few years.
“If we had believed that we would be independent, we would have stayed independent,” Beeman said, citing analyst projections that provider consolidations would gather more pace in the coming years.
However, regulatory experts gathered at a February workshop on health care competition sponsored by the Federal Trade Commission and Department of Justice Antitrust Division didn’t buy the “ACA made me do it” argument.
Providers are being encouraged to collaborate more and implement greater care coordination, they said, but — contrary to industry perception — that does not require consolidation.
“It's obvious that a lot of the participants in those programs, and a lot of the most successful participants in those programs, have not consolidated,” said James Landman, of the nonprofit Healthcare Financial Management Association in Illinois and a member of the panel. He was referring to the Affordable Care Act’s payment reform initiatives.
Mark Pauly, a health economist at the University of Pennsylvania, however, pointed out that those reforms are still “far from sweeping the field” as much of the U.S. population is not part of Medicare, which is administering the said reforms.
Landman said Thursday that AllSpire Health Partners is another good example of collaboration without consolidation. The seven-member consortium formed in 2013 includes both LG Health and another significant player in the Lancaster market — York-based WellSpan Health, which acquired what is now WellSpan Ephrata Community Hospital in 2013. While its members remain separate, they’re working together on population health management and purchasing.
Initiatives like AllSpire are relatively new on the health care landscape, Landman said, so there’s not a lot of research on them yet. But the very fact that they don’t affect market power — which is what drives cost increases — is promising.
Market forces matter
However, Landman said, the direct effects of the law aren’t the only factors affecting decisions like LG Health’s. For smaller providers especially, the costs of implementing electronic health records can be hard to bear on their own. On population health, scale does matter. And once some providers start partnering up and getting bigger — for whatever reason — that can put pressure on the rest of those in the market. No provider wants to be the last one standing alone.
“It is a period of very dramatic change in health care,” Landman said. “No one thinks they have the magic answer as to what the eventual configuration is going to look like.”
“I think what's driving hospitals and doctors to do the things they're doing this day is the incredible uncertainty that any great federal reform has,” panel member Lawton Robert Burns, director of the Wharton Center for Health Management and Economics at the University of Pennsylvania, said in the workshop. “There's a lemming instinct that goes on when these big reforms come out, and that lemming instinct happens to coincide with the herding instinct when they form these systems.”