Bigger Health Companies: Good for Medicare, Maybe Not for Others

merger signAlthough the Affordable Care Act (ACA) insurance expansion has directly provided coverage to only about 4 percent of Americans, changes embedded in ACA could affect many more people, and not always in good ways.

One such change is a provision that allows organizations that join forces to manage care for a large population to receive bonuses from Medicare for controlling costs and hitting quality targets (or face penalties if they do not). Medicare’s Accountable Care Organization model, as it’s called, favors larger health provider organizations that can manage the costs and quality of all types of care Medicare pays for, from primary care to high-intensity hospitalization and everything in between.

If that model works, it’ll be welcome news for Medicare and its beneficiaries. But health economists, myself included, have long worried about what larger provider organizations mean for private health insurance plans, the ones that serve most Americans under 65, through employer-based coverage or policies purchased on the Health Insurance Exchanges.

Larger organizations have greater market power to demand higher prices from those plans for doctor visits and hospital stays. And higher prices paid by plans translate into higher premiums for consumers. (This doesn’t apply to Medicare because its prices are set by the government, and no provider organization has so much market clout that it can force Medicare to raise prices.)

The competitive advantages of greater size and scope are not lost on health care organizations: Bigger is better for the bottom line. In the past, hospitals and physician groups have merged with one another and with insurers to form larger organizations that command greater market clout and drive up private prices and premiums. A wave of hospital mergers in the 1990s was followed by accelerated costs of care in the 2000s. Researchers have generally found that hospital consolidation has increased price without commensurate increases in quality.

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