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Growing chorus warns of perils in hospital, insurer mergers

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There’s a growing chorus among those who fear giants created by merging hospitals and insurers will squash innovation and boost prices.

Analysts that follow U.S. not-for-profit hospitals, which account for the majority of U.S. hospitals, last week issued a report warning investors that insurance “mega-mergers,” such as Anthem Inc.’s bid for Cigna Corp. and Aetna Inc.’s play for Humana Inc., would weaken hospital leverage in rate negotiations.

Anthem and Cigna combined “could garner nearly a quarter of the commercial insurance business, a large and typically profitable source of hospital revenue,” Moody’s Investors Service analysts wrote. The combination of Aetna and Humana would consolidate another 14% of commercial market.

“The increase leverage would likely reduce hospital profitability if insurers cut or lower increase in hospital rates,” Moody’s wrote.

One response will likely be continued hospital consolidation, Moody’s said.

“Hospital merger and acquisition activity aimed at driving down costs and growing market share will likely remain heavy in an effort to counter expanding insurers,” the analysts wrote.

The analysts’ concerns echo that of members of the American Hospital Association who recently penned a letter asking the Justice Department to closely scrutinize deals that would consolidate four of the largest U.S. health insurers.

The association said the merger of Anthem and Cigna across more than 800 markets could potentially undermine competition.

Insurers that challenge these giants in consolidated markets will struggle to win enough business and offer competitive prices, the association’s general counsel wrote. Even where the merged company sells off business, competition may suffer where buyers remain small.

Hospital systems have grown into regional giants in markets across the United States, with some of the largest U.S. systems using acquisitions and divestitures to grow market clout in key markets and exit others where their foothold is weaker. Catholic Health Initiatives made a string of deals to enter Texas that rapidly consolidated the system’s position there. Tenet Healthcare Corp. said it would sell St. Louis University Hospital earlier this year to exit a market where the company lacked leverage.

The American Hospital Association, in its letter to antitrust enforcers, argued insurers pose the real risk, not hospitals. “The size, scope and enduring impact of the announced deals far surpasses any hospital merger,” wrote Melinda Reid Hatton, the association’s general counsel. Insurance mergers are motivated by revenue and profit, she said. Hospital consolidation is instead a response to changes in health care financing and pressure to improve the quality of U.S. healthcare, she said.

Yet, many others fear hospitals’ larger size and market clout will result in higher prices.

Two Johns Hopkins researchers and a consultant last week warned in the Journal of the American Medical Association that hospital markets are already highly concentrated.

“A recent analysis of competition in 306 geographic health care markets in the United States, known as hospital referral regions, found that none of the markets are considered “highly competitive,” and nearly half are ‘highly concentrated,’ ” the authors wrote.

Mergers are not necessary to improve quality and efficiency, the motivation dealmakers cite for consolidation, they said. Instead, consolidation increases the risk that hospitals face little competitive pressure to improve quality and hold down costs.

The Federal Trade Commission made it clear in a recent blog post they agree.

“Competition typically improves consumer welfare through lower prices, expanded output, better service and more innovation,” they wrote. “Yet, some stakeholders argue that health care markets are different. They claim that, to achieve better outcomes and lower costs, health care markets need more cooperation, not more competition. We disagree.”

Melanie Evans writes for Modern Healthcare, a sister publication of Business Insurance.