Published January 9th, 2024 at 10:53 AM6 minute read
In the medical industry, the goal is increasingly straightforward: Get bigger. Or else.
Consider, for example, the merger of Kansas City’s St. Luke’s Health System with St. Louis-based BJC Health System. When the deal closed Jan. 2, the cross-state neighbors had created one of the country’s largest nonprofit health care systems, with 24 hospitals, 44,000 employees and $10 billion a year in revenue.
In an industry with rising costs, doctors and nurses in short supply and Goliath insurers holding the purse strings, hospitals feel pressured to grow to survive.
But an increasing number of economists and consumer advocates warn that the race for size could ultimately hurt patients, bringing higher prices to people on commercial insurance and dwindling access for those on Medicare and Medicaid.
Researchers also point to evidence of health system mergers chipping away at charity care and ballooning executive salaries.
“If we look back, traditionally, mergers have been good for the entities that merge, but not as good for the public,” said Louise Probst, executive director of the St. Louis Area Business Health Coalition, a nonprofit organization that works to help employers bring down health care costs. “Maybe this (St. Luke’s-BJC merger) could be different, and if it is, that’s wonderful.”
But the evidence is not promising.
A paper to be published in the February issue of The Journal of Law and Economics is the latest to find that privately insured patients in markets where hospitals have consolidated pay more, even when the merged hospitals weren’t competing for the same patients.
Hospitals argue they need to grow so they can negotiate higher reimbursement rates from giant insurance companies, pointing to costly overhead and rising costs.
“As the insurers get fewer and fewer, and therefore larger and larger, the health systems feel like in order to have any sort of negotiating power with them, they also need to get fewer and fewer and larger and larger,” said Barbara J. Zabawa, associate professor of law at the University of Missouri-Kansas City School of Law.
Christopher Garmon, assistant professor of health administration at UMKC’s Henry W. Bloch School of Management, an author of the study to be published in February, found mergers led to an average price increase of roughly 5% for commercially insured patients. Garmon’s study, which looked at whether recent increased antitrust scrutiny had changed the picture, concluded that “price effects of hospital mergers, on average, remain significant.”
That echoes earlier research. In 2018, for example, a study found that mergers in the same state, but between organizations that did not have facilities in the same geographic market, led to price increases of up to 10%.
“Empirical evidence suggests that a merger like this — and that doesn’t mean this one will — tend to increase prices for privately insured patients,” Garmon said. “Some of the emerging research could suggest that other patients could be affected as well.”
St. Luke’s and BJC officials first announced a possible merger last spring. The health care systems cut a formal deal in the fall and lobbied for regulatory approval. For more than a decade, St. Luke’s had been part of the BJC Collaborative, a group of health systems that pool resources to cut costs.
Chief Executive Richard Liekweg, who had overseen BJC before the merger and takes the helm of the merged entity, promised in a press release announcing the completed transaction that the merged health system would “enhance patient care and accelerate medical breakthroughs.”
The health system’s announcement also touted expanded access to clinical trials and “increased opportunities for shared research, innovation, and clinical collaboration among physicians and researchers.”
The merged system will continue to operate under the St. Luke’s logo in Kansas City and its western region. Hospital officials say patients will not notice any difference in care or operations.
St. Luke’s merger with BJC is far from unique. Just in the first three quarters of 2023, U.S. hospitals announced 53 planned mergers. And as the calendar turned to 2024, in Missouri alone three mergers closed. Along with St. Luke’s and BJC, University of Missouri Health Care united with Jefferson City-based Capital Region Medical Center, and Cape Girardeau-based SoutheastHealth joined St. Louis-based Mercy.
There could be another Kansas City-area merger this year. In November, Liberty Hospital and The University of Kansas Health System signed a letter of intent to partner, saying the partnership would bring “significant investments” in the much smaller Liberty Hospital.
Missouri state Sen. Greg Razer criticized the proposed deal, saying a hospital affiliated with the University of Kansas should not be allowed to reach across state lines and buy a hospital that is a legal subdivision of the state of Missouri. Liberty Hospital is governed by a publicly elected board of trustees.
“I don’t want to see a legal taxing entity within the state of Missouri sold to another state,” said Razer, a Jackson County Democrat who has introduced legislation to prevent the merger. “We can’t be invading each other’s states.”
But many health care executives see more industry consolidation as imperative. The American Hospital Association calls mergers and acquisitions “one of the most important tools that hospitals can use to increase access and quality of care and manage risk and financial pressures.”
Lawton Robert Burns, a professor of health care management at the University of Pennsylvania’s Wharton School, said the merging trend follows regulatory changes.
In a 2023 article in Milbank Quarterly, he pointed to a wave of mergers following the 1965 passage of Medicare, another wave with then-President Bill Clinton’s 1993 health plan proposal and a third with the 2010 adoption of the Affordable Care Act. Reacting to real or anticipated regulatory and payment model changes, health care executives turned to mergers.
“All of these systems have one common strategy, and you can boil it down to three words,” Burns said. “Just grow, baby.”
People who track the industry suspect the pandemic pushed the accelerator on mergers even more.
Since individual markets have become increasingly consolidated through mergers that occurred over the last few decades, hospitals are looking for partners in different geographic regions that face less regulatory scrutiny. According to a 2022 study, such “cross-market mergers” accounted for more than half of hospital mergers in the previous decade.
Insurance — the way most patients pay for medical expenses — drives hospitals to get bigger. Many say the reimbursements they receive from commercial insurance companies and from Medicare and Medicaid insurance are not covering growing costs. While Medicare and Medicaid rates are set by regulators, commercial insurance rates are negotiated. And many hospitals believe they’ll have more bargaining leverage negotiating higher rates if they’re bigger.
Even health systems that don’t compete for patients might fight with each other to get included in an insurance company’s network coverage. If a hospital is bigger, it may have a better chance.
Zabawa also said the transition to electronic records pushes hospital mergers because some of the largest contractors won’t bother with smaller hospitals.
Finally, hospitals compete for an increasingly small number of nurses and doctors. They gain leverage in recruiting and keeping those clinicians when they get bigger.
But a growing chorus of industry watchers says patients don’t gain from mergers.
“A merger tends to mean less competition, which leads to higher prices,” said Maribeth Guarino, a health care advocate with PIRG, the consumer watchdog organization. “There’s only one entity you can negotiate with and two choices a patient might have had became one and the same.”
Beyond higher prices, some evidence points toward hospital consolidation leading to fewer options for low-income patients.
In exchange for their tax-exempt status, nonprofit hospitals must give care to people who can’t afford it. It is unclear whether hospitals make charity care policies less generous when they merge, but even if they don’t, experts say, they may shift their gaze away from parts of the market where the neediest patients live.
That also could apply to Medicaid and Medicare patients, who may have less access to care once commercial insurance reimbursement rates increase. Studies show that after a merger, commercially insured patients pay rates that are at least 2 1/2 times greater than rates for Medicaid patients.
“Think about it,” Garmon said. “If you’re a hospital executive, you have one set of patients that is paying 2 1/2 times more than another set of patients, where are you going to locate your clinics? Where are you going to take your hospitals? Where are you going to locate your doctors? That’s why if you’re in Johnson County, you’re tripping over doctors — they’re everywhere. But if you’re in Wyandotte County, they’re nowhere.”
Burns said the public is largely unaware of the effect consolidation is having on health care prices and on patient care, which is why there hasn’t been more pushback. But that should change, he said.
“This is an ugly story,” Burns said. “It has nothing to do with patients. These mergers do not improve quality of care. And they do not reduce the cost of care.”
In fact, Burns said, one of the best incentives he can see for the mergers is executive compensation. Hospital chief executive salaries are pegged to salaries of CEOs at comparably sized health systems. The salaries also hang on metrics like patient volume, revenues and hospital beds, all of which increase when systems merge.
“Once you make these bigger systems, the system executives make the case to their board that, ‘Executives like me in bigger systems get paid more, so I ought to get paid more,’“ Burns said.
According to tax filings, Liekweg earned $3.3 million in 2021, plus $400,000 in other income. St. Luke’s CEO Melinda Estes, who retired at the time of the merger, earned just under $3 million the same year, plus $297,000 in other income.
In the merged hospital system, Liekweg will serve as CEO, Nick Barto was named president of the eastern region, which will operate under the BJC brand, and Julie Quirin, who had been a top executive under Estes, will be president of the western region.
Suzanne King Raney is a health reporter for The Beacon, where this story first appeared. The Beacon is a member of the KC Media Collective.