Greenville Health System and Palmetto Health have announced plans to form the largest health care system in the the state, but health care analysts caution that there are pros and cons to hospital consolidation.
And increasing health care costs are at the top of the list of concerns.
The arrangement, announced in June, would give the new company 1.2 million patients a year, $3.9 billion in annual revenue and more than 28,000 employees. And it would have a reach covering half the state.
GHS says the new partnership will allow it to attract programs, subspecialists and research dollars as well as access to services that don’t exist in this area now.
Experts say that comes with a cost.
A 2012 Robert Wood Johnson Foundation study concluded that hospital mergers generally result in higher prices no matter where they occur, with increases exceeding 20 percent in concentrated markets.
And Northwestern University researchers found that hospitals affiliating in the same state, but not the same market, resulted in price hikes of 6 percent to 10 percent, even when the systems were more than 90 minutes apart.
“When they merge together, they are a big animal and they have the game and can ask the insurance companies for more money,” said Emerson Smith, a medical sociologist and president of the Metromark Health Care Research Center in Columbia.
“And that in turn feeds back to the people who buy insurance and they have to pay more for it,” he added, saying it all comes down to the consumer in the end.
Costs do go up after a partnership, said Alwyn Cassil, an independent health policy consultant with Policy Translation in Silver Spring, Maryland.
“When two big players are becoming one really big player, that gives them market power and the ability to negotiate a harder line with payers,” she said. “They get better reimbursement from insurers because they’re the biggest game in town.”
Price and quality
Quality also can be affected by consolidation, research shows.
“In any industry, when there is a monopoly, prices tend to rise and quality tends to decline or, at least, doesn’t improve,” said Smith, who is also a clinical research professor of internal medicine at the University of South Carolina Medical School.
While lower quality isn’t inevitable, he said, it’s just as easy after a merger for any product that has a monopoly and is in demand to be sold at a higher price without focusing on quality because there’s no competition.
GHS says that because the two hospitals are not merging, but instead creating a new company that will handle only strategic and financial matters with each hospital remaining as a separate legal entity, assumptions about cost and quality don’t apply to this deal.
In addition, GHS said the affiliation doesn’t affect the hospitals’ respective bargaining positions with insurers.
CEO Mike Riordan said that GHS has been shifting its reimbursement model from fee-for-service to value-based care, which means a set payment for a patient based on outcomes and penalties for early readmissions. As a result, treatment is more proactive, he said, and the hospital risks not being paid if there aren’t good outcomes.
That approach, known as population health, improved quality and reduced costs for GHS employees as well as for Medicare patients, so costs should not increase, he said.
“It’s a different market dynamic,” he said. “We will try to create more value, and we think that will lower costs.”
Cassil says there’s no question that hospitals are under pressure today to deliver higher quality care and do it more efficiently. And population health is one way to do that, she said.
“Part of it is being big enough and having enough infrastructure in place to have true population health management — steering patients to the appropriate care setting, which big systems do,” she said. “They are able to deploy resources where they’re needed, when needed, at the right level of care.”
The deal will likely result in economies of scale, in administration and purchasing, for example, Cassil said. And having a large enough catchment area will also make services like organ transplant possible. GHS has been eyeing transplant services for some time.
But adding services, particulary high-end services like transplants, typically means higher costs as well, she said.
“Part of this alliance is together they’re bigger and can do more and add these services. If (the community) needs these services, then spending is worthwhile because you’re buying access to services that people need,” she said. “But ... if there is already sufficient capacity and you add capacity, the worry is that it will get used whether it needs to be or not.”
That drives up costs, she said.
But Riordan said that if someone needs a kidney transplant, the cost of that service is being paid to one hospital or another.
“So if those dollars are going to a system in Charlotte or Atlanta, a company is still paying those dollars and often at a premium because it could be out of network,” he said. “If it makes sense for us based on what our patients need, it will make sense financially.”
While research shows that competition is what improves cost and quality, Riordan said this arrangement won’t eliminate choice from either market because there will still be strong competitors in the Upstate and Midlands.
But the Robert Wood Johnson Foundation says costs go up even if the hospitals are not in the same market.
Riordan said the health care landscape is changing, and that providing affordable, quality health care will also take partnerships between providers and payers. The lines between insurers and hospitals are blurring nationally, he said, with insurers in South Carolina, for example, own urgent care centers and some hospitals acting as insurers.
GHS already contracts directly with large employers for health services, using insurers as third party administrators to handle the claims, Riordan said.
Another potential downside to having so much bargaining clout, Cassil said, is that the new entity could threaten insurers with leaving the network unless they get higher payments, leaving patients to look for other providers.
Job loss is also possible, Smith said, because the new company will be looking to reduce costs, as all health care systems are.
GHS acknowledges that to be more efficient, there will be staff reductions in some areas because employees make up a large part of costs, and the nation is facing potential Medicaid cuts. But it says the new company will continue to be a leading employer.
“Market pressures on us ... will require that we look at our costs in a serious way,” Riordan said.
Hospital consolidations have been occurring at an increasing rate as a hedge against reduced reimbursements in the changing heath care climate.
Some 52 transactions were recorded in the first half of 2016, up 6.1 percent from the same time in 2015, according to Kaufman Hall, a strategic and financial consulting firm based in Skokie, Illinois.
The GHS-Palmetto Health deal must still be reviewed by the Federal Trade Commission and the hospitals say they are confident it will be approved. Federal law prohibits making the hospital filing public.
An FTC spokeswoman said most requests are approved. When they aren’t, rising health care costs and reduced incentives to improve quality are the reasons generally cited.