[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]
EXAMINING THE IMPACT OF HEALTHCARE CONSOLIDATION
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS
OF THE
COMMITTEE ON ENERGY AND COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTEENTH CONGRESS
SECOND SESSION
__________
FEBRUARY 14, 2018
__________
Serial No. 115-99
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Printed for the use of the Committee on Energy and Commerce
energycommerce.house.gov
_______________
U.S. GOVERNMENT PUBLISHING OFFICE
30-071 PDF WASHINGTON : 2019
COMMITTEE ON ENERGY AND COMMERCE
GREG WALDEN, Oregon
Chairman
JOE BARTON, Texas FRANK PALLONE, Jr., New Jersey
Vice Chairman Ranking Member
FRED UPTON, Michigan BOBBY L. RUSH, Illinois
JOHN SHIMKUS, Illinois ANNA G. ESHOO, California
MICHAEL C. BURGESS, Texas ELIOT L. ENGEL, New York
MARSHA BLACKBURN, Tennessee GENE GREEN, Texas
STEVE SCALISE, Louisiana DIANA DeGETTE, Colorado
ROBERT E. LATTA, Ohio MICHAEL F. DOYLE, Pennsylvania
CATHY McMORRIS RODGERS, Washington JANICE D. SCHAKOWSKY, Illinois
GREGG HARPER, Mississippi G.K. BUTTERFIELD, North Carolina
LEONARD LANCE, New Jersey DORIS O. MATSUI, California
BRETT GUTHRIE, Kentucky KATHY CASTOR, Florida
PETE OLSON, Texas JOHN P. SARBANES, Maryland
DAVID B. McKINLEY, West Virginia JERRY McNERNEY, California
ADAM KINZINGER, Illinois PETER WELCH, Vermont
H. MORGAN GRIFFITH, Virginia BEN RAY LUJAN, New Mexico
GUS M. BILIRAKIS, Florida PAUL TONKO, New York
BILL JOHNSON, Ohio YVETTE D. CLARKE, New York
BILLY LONG, Missouri DAVID LOEBSACK, Iowa
LARRY BUCSHON, Indiana KURT SCHRADER, Oregon
BILL FLORES, Texas JOSEPH P. KENNEDY, III,
SUSAN W. BROOKS, Indiana Massachusetts
MARKWAYNE MULLIN, Oklahoma TONY CARDENAS, California
RICHARD HUDSON, North Carolina RAUL RUIZ, California
CHRIS COLLINS, New York SCOTT H. PETERS, California
KEVIN CRAMER, North Dakota DEBBIE DINGELL, Michigan
TIM WALBERG, Michigan
MIMI WALTERS, California
RYAN A. COSTELLO, Pennsylvania
EARL L. ``BUDDY'' CARTER, Georgia
JEFF DUNCAN, South Carolina
Subcommittee on Oversight and Investigations
GREGG HARPER, Mississippi
Chairman
H. MORGAN GRIFFITH, Virginia DIANA DeGETTE, Colorado
Vice Chairman Ranking Member
JOE BARTON, Texas JANICE D. SCHAKOWSKY, Illinois
MICHAEL C. BURGESS, Texas KATHY CASTOR, Florida
SUSAN W. BROOKS, Indiana PAUL TONKO, New York
CHRIS COLLINS, New York YVETTE D. CLARKE, New York
TIM WALBERG, Michigan RAUL RUIZ, California
MIMI WALTERS, California SCOTT H. PETERS, California
RYAN A. COSTELLO, Pennsylvania FRANK PALLONE, Jr., New Jersey (ex
EARL L. ``BUDDY'' CARTER, Georgia officio)
GREG WALDEN, Oregon (ex officio)
(ii)
C O N T E N T S
----------
Page
Hon. Gregg Harper, a Representative in Congress from the State of
Mississippi, opening statement................................. 1
Prepared statement........................................... 3
Hon. Diana DeGette, a Representative in Congress from the State
of Colorado, opening statement................................. 4
Prepared statement........................................... 6
Hon. Greg Walden, a Representative in Congress from the State of
Oregon, opening statement...................................... 7
Prepared statement........................................... 8
Hon. Frank Pallone, Jr., a Representative in Congress from the
State of New Jersey, opening statement......................... 10
Prepared statement........................................... 11
Witnesses
Martin Gaynor, Ph.D., E.J. Barone University Professor of
Economics and Health Policy, Heinz College, Carnegie Mellon
University..................................................... 13
Prepared statement........................................... 16
Answers to submitted questions............................... 149
Leemore S. Dafny, Ph.D., Bruce V. Rauner Professor of Business
Administration, Harvard Business School........................ 42
Prepared statement........................................... 44
Answers to submitted questions \1\........................... 154
Kevin A. Schulman, M.D., Professor of Medicine, Duke University,
and Visiting Scholar, Harvard Business School.................. 66
Prepared statement........................................... 69
Answers to submitted questions............................... 156
Submitted Material
Subcommittee memorandum.......................................... 126
Article of March 24, 2008, ``Building Something Worth Building
for All Patients,'' by Rep. Michael Burgess, Health Affairs
Blog, submitted by Mr. Burgess................................. 137
Statement of the National Community Pharmacists Association,
February 14, 2018, submitted by Mr. Griffith................... 144
----------
\1\ Dr. Dafny did not answer submitted questions for the record
by the time of printing.
EXAMINING THE IMPACT OF HEALTHCARE CONSOLIDATION
----------
WEDNESDAY, FEBRUARY 14, 2018
House of Representatives,
Subcommittee on Oversight and Investigations,
Committee on Energy and Commerce,
Washington, DC.
The subcommittee met, pursuant to call, at 10:17 a.m., in
room 2322, Rayburn House Office Building, Hon. Gregg Harper
(chairman of the subcommittee) presiding.
Members present: Representatives Harper, Griffith, Burgess,
Brooks, Collins, Barton, Walberg, Walters, Costello, Carter,
Walden (ex officio), DeGette, Schakowsky, Castor, Tonko, Ruiz,
Peters, and Pallone (ex officio).
Staff present: Jennifer Barblan, Chief Counsel, Oversight
and Investigations; Adam Buckalew, Professional Staff Member,
Health; Zack Dareshori, Legislative Clerk; Lamar Echols,
Counsel, Oversight and Investigations; Margaret Tucker Fogarty,
Staff Assistant; Ed Kim, Policy Coordinator, Health; Jennifer
Sherman, Press Secretary; Natalie Turner, Counsel, Oversight
and Investigations; Hamlin Wade, Special Advisor for External
Affairs; Jeff Carroll, Minority Staff Director; Evan Gilbert,
Minority Press Assistant; Tiffany Guarascio, Minority Deputy
Staff Director and Chief Health Advisor; Zach Kahan, Minority
Outreach and Member Services Coordinator; Christopher Knauer,
Minority Oversight Staff Director; Miles Lichtman, Minority
Policy Analyst; Kevin McAloon, Minority Professional Staff
Member; Andrew Souvall, Minority Director of Communications,
Outreach and Member Services; and C.J. Young, Minority Press
Secretary.
Mr. Harper. The subcommittee convenes this hearing entitled
``Examining the Impact of Healthcare Consolidation.''
I want to welcome our witnesses, who will be introduced in
more detail momentarily. The Chair will now recognize himself
for purposes of an opening statement.
OPENING STATEMENT OF HON. GREGG HARPER, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF MISSISSIPPI
The price of healthcare in the United States has steadily
risen for several decades. In 2016, U.S. healthcare spending
was estimated to be around $3.3 trillion, and the gross
domestic product related to healthcare spending was 17.9
percent, an increase from 17.7 percent just the year before.
Data shows that the increasing costs of healthcare are
ultimately passed along to American workers and families. This
trend is concerning for all Americans and is an issue the
committee will continue to examine here today and in the
future.
While there are numerous factors contributing to the rising
cost of healthcare, reports and studies show consolidation is a
contributing factor.
Consolidation is not a new phenomenon. It has been
occurring for decades among hospitals, doctors, the
pharmaceutical industry, and insurance companies.
To date, most studies and data have focused on hospital and
insurer consolidations. The effects of cross-market
consolidations and other types of vertical consolidations are
less clear.
Horizontal hospital consolidation--the consolidation of
hospitals into a single larger system--has grown at a rapid
pace this past decade.
According to the Medicare Payment Advisory Commission,
MedPAC, hospital markets are now highly consolidated. In 2012,
MedPAC found that a single hospital system counted for a
majority of Medicare discharges in 146 of 391 metropolitan
areas.
Similarly, a researcher found that in 2016, 90 percent of
metropolitan areas were highly concentrated for hospitals.
Through vertical consolidation, hospitals have also acquired a
significant number of physician practices over the past decade.
A recent analysis shows that the number of physicians
employed by hospitals increased by 49 percent between 2012 and
2015. The Government Accountability Office found that between
2007 to 2014 the number of vertically consolidated physicians
nearly doubled, from 9,600 to 182,000.
There also appears to be a significant amount of
consolidation in the health insurance industry. The estimated
nationwide market share of largest four insurers increased from
74 percent in 2006 to 83 percent in 2014.
Recently, the U.S. Department of Justice successfully
blocked two mergers between major health insurance companies,
noting that the mergers would violate antitrust laws and would
lead to higher healthcare costs for consumers.
Given DOJ's success in challenging these mergers, some
analysts have speculated that we will start seeing more
vertical integration in the healthcare space.
Additionally, the FTC--Federal Trade Commission--has
recently been successful challenging horizontal mergers of
providers that supply similar services in geographic proximity.
However, the FTC and DOJ do not appear to regularly
challenge vertical consolidations. Since 2000, the FTC and DOJ
have challenged only 22 total vertical mergers.
The move towards consolidation raises questions as to what
is really meant and what this really means for patients.
Hospitals and providers contend that consolidation makes
facilities more efficient by eliminating duplicative services,
reducing administrative burdens, and improving quality of care.
Physicians are incentivized for many reasons to consolidate
with hospitals, including more payment stability and less
financial and regulatory burdens.
Many experts point to Medicare paying more for the same
services at hospitals than at a physician's office as a leading
factor in providers consolidating with hospitals.
While many benefits of consolidation are difficult to
measure, the majority of studies and literature shows that
horizontal hospital consolidation leads to higher prices.
For example, according to MedPAC, horizontal consolidation
of hospitals has contributed to the discrepancy between prices
Medicare pays hospitals and what commercial insurers pay.
In fact, a study found that in 2012, the average private
price was 75 percent higher than Medicare prices after
hospitals consolidate. Additionally, a 2018 study looked at
hospital and physician consolidations. It found that from 2007
to 2013 almost 10 percent of physician practices reviewed were
acquired by a hospital.
After being acquired, the services offered by physicians
increased an average of 14 percent. In response to the growing
number of consolidations in the healthcare industry, in October
of 2017, the Trump administration issued an executive order to
foster greater competition in the healthcare markets and
directing the administration to promote competition in and
limit excessive consolidation in the healthcare system.
Health and Human Services was directed to collect public
comments on these issues, and we look forward to hearing and
learning what innovative solutions HHS discovers during this
process.
Consolidation in the healthcare industry raises many
important questions relating to competition and innovation. For
instance: Why has consolidation increased during the past
decade? Is consolidation good for patients? What changes could
Congress or HHS make to encourage competition and innovation in
healthcare?
I welcome and thank the witnesses for being here. We look
forward to their testimony.
[The prepared statement of Mr. Harper follows:]
Prepared statement of Hon. Gregg Harper
The subcommittee convenes this hearing entitled ``Examining
the Impact of Healthcare Consolidation.''
The price of healthcare in the United States has steadily
risen for several decades. In 2016, U.S. healthcare spending
was estimated to be around $3.3 trillion, and the gross
domestic product related to healthcare spending was 17.9
percent, an increase from 17.7 percent just the year before.
Data shows that the increasing costs of healthcare are
ultimately passed along to American workers and families. This
trend is concerning for all Americans and is an issue the
committee will continue to examine here today and in the
future.
While there are numerous factors contributing to the rising
costs of healthcare, reports and studies show consolidation is
a contributing factor. Consolidation is not a new phenomenon.
It has been occurring for decades among hospitals, doctors, the
pharmaceutical industry, and insurance companies.
To date, most studies and data have focused on hospital and
insurer consolidations. The effects of cross-market
consolidations and other types of vertical consolidations are
less clear.
Horizontal hospital consolidation--the consolidation of
hospitals into a single larger system--has grown at a rapid
pace the past decade. According to the Medicare Payment
Advisory Commission (MedPAC), hospital markets are now highly
consolidated. In 2012, MedPAC found that a single hospital
system accounted for a majority of Medicare discharges in 146
of 391 metropolitan areas. Similarly, a researcher found that
in 2016, 90 percent of metropolitan areas were highly
concentrated for hospitals.
Through vertical consolidation, hospitals have also
acquired a significant number of physician practices over the
past decade. A recent analysis shows that the number of
physicians employed by hospitals increased by 49 percent
between 2012 and 2015.
The Government Accountability Office found that between
2007 to 2014, the number of vertically consolidated physicians
nearly doubled from about 96,000 to 182,000.
There also appears to be a significant amount of
consolidation in the health insurance industry. The estimated
nationwide market share of the largest four insurers increased
from 74 percent in 2006 to 83 percent in 2014. Recently, the
U.S. Department of Justice (DOJ) successfully blocked two
mergers between major health insurance companies, noting that
the mergers would violate antitrust laws and would lead to
higher healthcare costs for consumers.
Given DOJ's success in challenging these mergers, some
analysts have speculated that we'll start seeing more vertical
integration in the healthcare space. Additionally, the Federal
Trade Commission (FTC) has recently been successful challenging
horizontal mergers of providers that supply similar services in
geographic proximity.
However, the FTC and DOJ do not appear to regularly
challenge vertical consolidations. Since 2000, the FTC and DOJ
have challenged only 22 vertical mergers in total.
The move toward consolidation raises questions as to what
it really means for patients. Hospitals and providers contend
that consolidation makes facilities more efficient by
eliminating duplicative services, reducing administrative
burdens, and improving quality of care. Physicians are
incentivized for many reasons to consolidate with hospitals,
including more payment stability and less financial and
regulatory burdens. Many experts point to Medicare paying more
for the same services at hospitals than a physician's office as
a leading factor in providers consolidating with hospitals.
While many benefits of consolidation are difficult to
measure, the majority of studies and literature shows that
horizontal hospital consolidation leads to higher prices.
For example, according to MedPAC, horizontal consolidation
of hospitals has contributed to the discrepancy between prices
Medicare pays hospitals and what commercial insurers pay. In
fact, a study found that in 2012, the average private price was
75 percent higher than Medicare prices after hospitals
consolidate. Additionally, a 2018 study looking at hospital/
physician consolidations found that from 2007 to 2013, almost
10 percent of physician practices reviewed were acquired by a
hospital. After being acquired, the services offered by
physicians increased an average of 14 percent.
In response to the growing number of consolidations in the
healthcare industry, in October 2017, the Trump administration
issued an Executive Order to foster greater competition in the
healthcare markets and directing the administration to promote
competition in and limit excessive consolidation in the
healthcare system. Health and Human Services was directed to
collect public comments on these issues.
We look forward to learning what innovative solutions HHS
discovers during this process.
Consolidation in the healthcare industry raises many
important questions relating to competition and innovation.
Why has consolidation increased during the past
decade?
Is consolidation good for patients?
What changes could Congress or HHS make to
encourage competition and innovation in healthcare?
I welcome and thank the witnesses, and look forward to
their testimony.
Mr. Harper. At this time, the Chair will recognize the
ranking member of the subcommittee, Ms. DeGette.
OPENING STATEMENT OF HON. DIANA DEGETTE, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF COLORADO
Ms. DeGette. Thank you so much, Mr. Chairman.
As we will hear from the witnesses today, we have seen a
long-term trend in consolidation in the healthcare sector,
where the market has become increasingly dominated by fewer and
fewer companies.
This trend goes back 20 years or more and, frankly, it had
real impacts on consumers. Excessive consolidation leaves
consumers with few choices, which not only limits their care
options but also has the potential to raise prices.
And it's not just individual consumers who are paying more.
When Medicare's expenditures go up, then taxpayers suffer as
well.
You know, it's important to note consolidation is not per
se negative. Hospital mergers can enable providers to combine
resources and improve coordination of care.
But, if increased market power allows them to raise their
prices with no competitive alternatives, then entire
communities can suffer.
We have also seen increasing numbers of hospitals acquiring
physician practices. Twenty Sixteen marked the first time that
less than half of physicians own their own practice. Again,
this can result in increased expenditures when the same
services are now provided but at higher prices.
Although hospitals point to the reduced inefficiencies and
regulatory burdens on physicians that can result from these
acquisitions, it's really clear that the delivery of care is
changing, and not always to the benefit of patients and payers.
Likewise, when insurance companies are able to pull their
market power to negotiate lower rates, there can be positive
results. But not so when they push the other competitors out of
the market or when the savings are not passed on to consumers.
For example, last year we saw the courts strike down two
mergers between large insurers. These companies were already
among the biggest players in the market, and it was recognized
that the merged companies would stifle competition and
innovation.
It's really possible that we're going to see more attempted
mergers of this kind, and consumers need to get advocates on
their behalf.
These issues affect all segments of the healthcare market,
including prescription drugs. As you know, Mr. Chairman, I've
long been concerned about the rising price of drugs, and
insulin in particular.
Congressman Tom Reed and I were the co-chairs of the
Diabetes Caucus, and we are in the process of conducting an
inquiry into insulin prices.
Our early findings suggest that consolidation across
different parts of the so-called drug supply chain is indeed
affecting what patients pay for their medications.
The problem has ramifications not just for consumers who
rely on these medicines but also for the employers and public
and private insurance companies that pay for them.
And, so as we talk about these issues, it's important to
know that pharmacy benefit managers have also seen this sort of
consolidation we are going to hear about today.
PBMs have an enormous influence in the prescription drug
market, and yet the entire market is dominated by just a few of
them.
So I am eager to hear the witnesses' thoughts on these
issues. It's going to be my line of questioning, so you can
start to think about that now and what we can do to address it.
Frankly, we also need more innovative solutions that have
potential to upend the inefficiencies in the market. Amazon,
J.P. Morgan, and Berkshire Hathaway recently made news when
they announced a joint venture to reduce healthcare costs for
their companies.
Well, it remains to be seen how effective this merger will
be, but it does show that there is a need in the market for
innovation.
Mr. Chairman, these are complex issues and we're not going
to solve them today, even with our best efforts. While I
recognize there can be legitimate and even good reasons for
consolidation, the long-term trends are alarming, and the need
for new approaches is clear.
I look forward to hearing from the witnesses about what the
research tells us are these underlying problems, what the real-
world effects are, and what we can do to help.
And with that, I yield back.
[The prepared statement of Ms. DeGette follows:]
Prepared statement of Hon. Diana DeGette
Thank you, Mr. Chairman. As we will hear from the witnesses
today, we have seen a long-term trend in consolidation in the
healthcare sector, where the market has become increasing
dominated by fewer companies. This trend goes back 20 years or
more, and it has real effects on all consumers.
Excessive consolidation leaves consumers with few choices,
which not only limits their care options, but can also raise
their prices. And let's not forget that it is not just
individual consumers who are paying more: when Medicare's
expenditures go up, the taxpayers suffer as well.
Consolidation does not always have to be negative. Hospital
mergers can enable providers to combine their resources and
improve coordination of care. But if their increased market
power allows them to raise their prices with no alternative for
consumers, entire communities can suffer.
We have also seen increasing numbers of hospitals acquiring
physician practices. Twenty Sixteen marked the first time that
less than half of physicians owned their own practice. This can
result in increased expenditures when the same services are now
paid at higher rates. Although hospitals point to the reduced
inefficiencies and regulatory burdens on physicians that result
from these acquisitions, it is clear that the delivery of care
is changing, and not always to the benefit of patients and
payers.
Likewise, when insurance companies are able to pool their
market power to negotiate lower rates, there can be positive
results--but not when they push all other competitors out of
the market, or when the savings are not passed down to
consumers.
For instance, a year ago we saw the courts strike down two
mergers between large insurers. These companies were already
among the biggest players in the market, and it was recognized
that the merged companies would stifle competition and
innovation. It is very possible we will see more attempted
mergers of this kind, and consumers need advocates on their
behalf.
These issues affect all segments of the healthcare market,
including prescription drugs. As you know, Mr. Chairman, I have
long been concerned about the rising price of drugs, and
insulin in particular. Congressman Tom Reed (R-NY) and I are in
the process of conducting an inquiry into insulin prices
through the Diabetes Caucus. Our early findings suggest that
consolidation across different parts of the so-called ``drug
supply chain'' is indeed affecting what patients pay for their
medicines. This problem has ramifications not just for the
consumers who rely on these medicines, but also the employers
and private and public insurance programs that pay for them.
So as we talk about these issues, it is important to note
that pharmacy benefit managers (PBMs) have also seen the sort
of consolidation we will hear about today. PBMs have enormous
influence in the prescription drug market, and yet the entire
market is dominated by just a few PBMs. I am eager to hear the
witnesses' thoughts on this problem, and what more can be done
to address it.
We also need more innovative solutions that have potential
to upend the inefficiencies in the market. Amazon, J.P. Morgan,
and Berkshire Hathaway recently made news when they announced a
joint venture to reduce healthcare costs for their companies.
While it remains to be seen how effective this venture will be,
it clearly shows there is a need in the market for innovation.
Mr. Chairman, these are complex issues, and the solutions
will not be simple. While I recognize that there can be
legitimate and even beneficial reasons for consolidation, the
long-term trends are alarming, and the need for new approaches
is clear. I look forward to hearing from the witnesses about
what the research tells us are the underlying problems, what
the real-word effects are, and what steps we can take to help.
I yield back.
Mr. Harper. The gentlewoman yields back.
The Chair will now recognize the chairman of the full
committee, Mr. Walden, for purposes of an opening statement.
OPENING STATEMENT OF HON. GREG WALDEN, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF OREGON
Mr. Walden. Well, thank you, Chairman Harper. We appreciate
your leadership on these issues.
As you mentioned in your opening statement, healthcare
costs continue to rise in the United States. We are all paying
higher costs.
In 2016 alone, the U.S. spent about $3.3 trillion--that's
more than $10,000 per person--on healthcare. And as I've said
on numerous occasions, this committee is dedicated to
investigating all of the cost drivers in our healthcare system
from top to bottom.
For example, we have been looking at the 340B drug pricing
program for the past 2 years, and just last month we issued our
report. Pretty comprehensive on the findings and
recommendations.
Last December, the Health Subcommittee held a hearing
examining the drug supply chain and the impact each
participant's supply chain has and the ultimate cost to
patients.
And today we want to explore consolidation in the
healthcare industry and the impact consolidation has on
consumers. Mergers and acquisitions are changing the healthcare
landscape across the United States and over the past few years
there is been a continuous stream of horizontal and vertical
merger announcements between hospitals, insurers, physician
groups, pharmaceutical companies, pharmaceutical benefit
managers, pharmacies, and other healthcare firms, and those are
just the deals we know about.
Some mergers are so small they don't make it onto the
congressional radar screen, and in the aggregate, however, even
these small mergers could have an impact on consumers--
sometimes positively, sometimes negatively.
So one of the central questions that I hope we explore
today is, What does this consolidation mean for patients? My
principle is: Put the consumers first and you'll have pretty
good policy, because that means you've got competition, drives
innovation and choice, and should drive down price.
On the one hand, consolidation is potentially good for
patients by reducing the cost of care and improving outcomes
through improved efficiencies and better care coordination. It
can be that.
On the other hand, we are concerned that some consolidation
could actually lead to higher prices for patients, doesn't lead
to improved quality of care, and so we want to hear both
perspectives today and what the right public policy position
should be.
So today, we also want to explore how consolidation impacts
innovation. Last month, we all heard the news that Amazon,
Berkshire Hathaway, and J.P. Morgan are going to partner, try
to improve employee satisfaction, reduce healthcare costs for
their United States employees.
That sure caught my attention because, if you want to talk
about disruptors, I think at least Amazon you'd put at the top
of the list of how to disrupt things that are otherwise
bureaucratically constrained. And with the horsepower of
Berkshire Hathaway and J.P. Morgan, something big could happen
in this space, and it needs to.
Although we still know very little about their plans, I am
intrigued by this partnership, and we will continue to monitor
it closely, and when they are ready to come share information
with us, we will be all open arms to hear how it's going to
work.
Similarly, a group of several hospital systems recently
announced their decision to enter the generic drug industry and
develop a not-for-profit generic drug company. One thing I'd
like to hear more about today is whether consolidation makes it
more or less likely that we will see innovation in the
healthcare market.
And finally, we also need a better understanding of what's
driving consolidation, whether Congress should be trying to do
anything about it.
We have heard a lot about how disparities in payments
across sites of service may result in market consolidation, and
as a result Congress took a step toward equalizing payment
rates across different sites of care through the Bipartisan
Budget Act of 2015.
But we continue to hear about some of these inequities in
payment rates. And as I mentioned earlier, the committee has
been closely examining the 340B program. During this work, we
found 340B program creates an incentive for hospitals to
acquire independent physician offices that are not eligible for
340B discounts, especially in the oncology space.
One report showed there was a 172 percent increase in the
consolidation of community oncology practices since 2008. A
recent article in the New England Journal of Medicine found,
among other things, that the 340B program has been associated
with hospital consolidation in hematology oncology.
So as evidenced by these examples, the committee needs to
carefully review these types of policies and ensure that any
Federal policies that create incentives for consolidation are
appropriate and ultimately benefit patients and consumers.
[The prepared statement of Mr. Walden follows:]
Prepared statement of Hon. Greg Walden
Thank you, Mr. Chairman, for holding this hearing on the
very important issue of consolidation in the healthcare
industry.
As Chairman Harper mentioned in his opening statement,
healthcare costs continue to rise in the United States. In 2016
alone, the U.S. spent about $3.3 trillion-more than $10,000 per
person-on healthcare.
As I've said on numerous occasions, this committee is
dedicated to investigating the cost drivers in our healthcare
system from top to bottom.
For example, we have been looking into the 340B Drug
Pricing Program for the past 2 years. Just last month, the
committee issued a comprehensive report detailing its 340B
investigation and findings. Last December, the Health
Subcommittee held a hearing examining the drug supply chain and
the impact each participant in the supply chain has in the
ultimate cost to patients.
Today we want to explore consolidation in the healthcare
industry and the impact of consolidation on consumers.
Mergers and acquisitions are changing the healthcare
landscape across the country. Over the past few years, there
has been a continuous stream of horizontal and vertical merger
announcements between hospitals, insurers, physician groups,
pharmaceutical companies, pharmaceutical benefit managers,
pharmacies, and other healthcare firms. And those are just the
deals we know about-some mergers are so small they don't make
it onto our radar. In the aggregate, however, even these small
mergers may have an impact on consumers.
One of the central questions that we want to explore today
is what does this consolidation mean for patients? On the one
hand, consolidation is potentially good for patients by
reducing the cost of care and improving outcomes through
improved efficiencies and better care coordination. On the
other hand, we're concerned that some consolidation could lead
to higher prices for patients and not improve the quality of
care that they receive from their doctor. I look forward to
hearing more on both perspectives from our witnesses today.
Today we also want to explore how consolidation impacts
innovation. Last month, we all heard the news that Amazon,
Berkshire Hathaway, and JP Morgan are going to partner and try
to improve employee satisfaction and reduce healthcare costs
for their U.S. employees. Although we still know very little
about their plans, I'm intrigued by this partnership and plan
to continue to closely monitor it as the plans develop.
Similarly, a group of several hospital systems recently
announced their decision to enter the generic drug industry and
develop a not-for-profit generic drug company. One thing I'd
like to hear more about today is whether consolidation makes it
more-or less-likely that we will see innovation in the
healthcare market.
Finally, we also need to better understand what is driving
consolidation and whether Congress should be trying to do
anything about it.
We've heard a lot about how disparities in payments across
sites of service may result in market consolidation, and as a
result, Congress took a step toward equalizing payments rates
across different sites of care through the Bipartisan Budget
Act of 2015. We continue to hear concerns about inequities in
payment rates.
As I previously mentioned, the committee has been closely
examining the 340B program over the past 2 years. During this
work, we found that the 340B program creates an incentive for
hospitals to acquire independent physician offices that are not
eligible for the 340B discount-especially in the oncology
space. One report showed that there was a 172 percent increase
in the consolidation of community oncology practices since
2008. A recent article in the New England Journal of Medicine
found among other things that the 340B program has been
associated with hospital consolidation in hematology-oncology.
As evidenced by these examples, the committee needs to
carefully review these types of policies and ensure that any
Federal policies that create incentives for consolidation are
appropriate and ultimately benefit patients and consumers.
I would like to thank the witnesses for testifying here
today and I look forward to hearing your testimony.
Mr. Walden. I now yield to Dr. Burgess the remainder of my
time.
Mr. Burgess. Well, thank you, Mr. Chairman, and I want to
take a moment to acknowledge that one of our witnesses this
morning, Dr. Dafny, is the daughter of Nachum Dafny, who taught
me neuroscience a long time ago at the University of Texas
Medical School at Houston, affectionately known by the acronym
``UTMUSH'' by its friends. But I understand Dr. Dafny is still
active in teaching, and so I was grateful to learn that this
morning and certainly want to welcome Dr. Dafny to our
subcommittee.
Mr. Chairman, I also have a unanimous consent request. It's
probably just an oversight that we don't have a witness here
talking about physician ownership of facilities.
So I have a paper from Health Affairs. It was published
March of 2008, and, while that was 10 years ago, it does not
diminish the overall brilliance and the keen insights provided
in this paper, and it was actually written by your humble
chairman of the Health Subcommittee.
So I ask unanimous consent to put that into the record.
Mr. Harper. Without objection.
[The information appears at the conclusion of the hearing.]
Ms. DeGette. Wait a minute. I am going to have to reserve--
--
[Laughter.]
Ms. DeGette. I am going to reserve a point of order on
that.
Mr. Harper. It was questionable, but without objection, it
is admitted.
With that, the Chair will now recognize Mr. Pallone, the
ranking member of the full committee, for the purposes of an
opening statement.
OPENING STATEMENT OF HON. FRANK PALLONE, JR., A REPRESENTATIVE
IN CONGRESS FROM THE STATE OF NEW JERSEY
Mr. Pallone. Thank you, Mr. Chairman.
The issues we will hear about today are critical for
understanding the healthcare market. We have continued to see a
long-term trend of consolidation in the healthcare industry,
including among providers and insurers, and it's important we
look at these trends with careful scrutiny.
While consolidation is not necessarily a bad thing, it's
important we understand the implications for consumers. I often
worry, Mr. Chairman, that the people who do the consolidation
want to say that it's great and rosy and they do, you know, put
out all kinds of propaganda and literature and billboards
saying how great it is, but that doesn't necessarily mean it's
the case.
For example, when insurance companies merge they often cite
the advantages of increased market power to reduce
administrative costs and negotiate lower prices. However, that
has not always been the result. In fact, research has shown
that some insurer mergers have led to increased premiums for
consumers, and this is something we need to be watching very
closely.
If the insurance market becomes dominated by fewer
companies that only grow bigger, consumers will not benefit.
For example, in 2016 the Department of Justice had to intervene
in Aetna's acquisition of Humana as well as Anthem's
acquisition of Cigna.
The courts determined that those deals would have hurt
competition and innovation, and 1 year ago today the two
mergers were called off.
Although those mergers were canceled, these trends are
continuing and have been building for quite some time. Fifteen
years ago, most States saw a third of their market controlled
by a single insurer.
That consolidation continues to accelerate to the point
where in 2014 the top four insurers controlled 83 percent of
the market nationwide.
More recently, CVS Health announced that it would acquire
the insurer Aetna. While it's still too early to tell what this
merger will mean for consumers, it certainly raises questions
about how competitive the market will be and how these types of
vertical consolidations will affect the delivery of care.
Instead of the market being dominated by a few large
companies, it's important for consumers to have choices when
picking their insurance plans. This insures not only a wider
array of health benefits to fit their needs, but also brings
down consumer costs.
For instance, the Department of Health and Human Services
found that higher numbers of insurers were associated with slow
growth in insurance premiums.
Providers have also not been immune to these consolidation
trends. Between '98 and 2015, there were over 1,400 hospital
mergers and acquisitions. Certainly, that's the case in my
State of New Jersey. In 2015, the number of hospitals involved
in such deals was more than three times what it was in 2008.
Now, some consolidation in the market may be inevitable.
But, just as we critically examine insurance mergers with an
eye to the impact on consumers, our first concern with provider
consolidation should also be with the patients who will be
affected.
Hospitals often point to the advantages of consolidation,
such as reduced costs of capital and benefits of scale.
However, we have also seen some evidence that mergers can lead
to increased prices for hospital care. The GAO has found that
it's also true in vertical consolidations. When hospitals
acquire physician practices, Medicare expenditures can go up as
care is provided in more expensive hospital outpatient
settings.
And prices should not be our only concern. While a larger
hospital system may be able to provide more services, it's not
at all clear that provider consolidation necessarily leads to
better quality of care.
So these are complex issues, and I look forward to hearing
what the latest research says about the long-term trends in
consolidation and, most importantly, what the effects are for
consumers.
And unless one of my colleagues wants the time, I'll yield
back, Mr. Chairman.
[The prepared statement of Mr. Pallone follows:]
Prepared statement of Hon. Frank Pallone, Jr.
The issues we will hear about today are critical for
understanding the healthcare market. We have continued to see a
long-term trend of consolidation in the healthcare industry,
including among providers and insurers--and it is important we
look at these trends with careful scrutiny.
While consolidation is not necessarily a bad thing in all
instances, it is important we understand the implications for
consumers.
For example, when insurance companies merge, they often
cite the advantages of increased market power to reduce
administrative costs and negotiate lower prices. However, that
has not always been the result. In fact, research has shown
that some insurer mergers have led to increased premiums for
consumers. This is something we need to be watching very
closely.
If the insurance market becomes dominated by fewer
companies that only grow bigger, consumers will not benefit.
For example, in 2016, the Department of Justice had to
intervene in Aetna's acquisition of Humana, as well as Anthem's
acquisition of Cigna. The courts determined that those deals
would have hurt competition and innovation, and 1 year ago
today, the two mergers were called off.
Although those mergers were canceled, these trends are
continuing, and have been building for quite some time. Fifteen
years ago, most States saw a third of their market controlled
by a single insurer. That consolidation continues to accelerate
to the point where in 2014, the top four insurers controlled 83
percent of the market nationwide.
More recently, CVS Health announced that it would acquire
the insurer Aetna. While it is still too early to tell what
this merger will mean for consumers, it certainly raises
questions about how competitive the market will be and how
these types of vertical consolidations will affect the delivery
of care.
Instead of the market being dominated by a few large
companies, it is important for consumers to have choices when
picking their insurance plans. This ensures not only a wider
array of health benefits to fit their needs, but also helps
bring down consumer costs. For instance, the Department of
Health and Human Services found that higher numbers of insurers
were associated with slowed growth in insurance premiums.
Providers have also not been immune to these consolidation
trends. Between 1998 and 2015 there were over 1,400 hospital
mergers and acquisitions. In 2015, the number of hospitals
involved in such deals was more than three times what it was in
2008.
Now, some consolidation in the market may be inevitable.
But just as we critically examine insurer mergers with an eye
on the impact on consumers, our first concern with provider
consolidation should also be with the patients who will be
affected.
Hospitals often point to advantages of consolidation, such
as reduced costs of capital and benefits of scale. However, we
have also seen some evidence that mergers can lead to increased
prices for hospital care.
The Government Accountability Office has found that this is
also true in vertical consolidations: when hospitals acquire
physician practices, Medicare expenditures can go up as care is
provided in more expensive hospital outpatient settings.
And prices should not be our only concern here. While a
larger hospital system may be able to provide more services, it
is not clear that provider consolidation necessarily leads to
better quality of care.
These are complex issues, and I look forward to hearing
what the latest research says about the long-term trends in
consolidation, and most importantly, what the effects are for
consumers.
Thank you, I yield back.
Mr. Harper. The gentleman yields back.
I ask unanimous consent that the Members' written opening
statements be made part of the record, and without objection
they will so be entered into the record.
I would now like to introduce our panel of witnesses for
today's hearing. Today we have Dr. Martin Gaynor, the E.J.
Barone University professor of economics and health policy at
Carnegie Mellon University. Welcome, sir. We are glad to have
you with us today.
Next is Leemore Dafny. Dr. Leemore Dafny, who is the Bruce
V. Rauner professor of business administration at Harvard
Business School. Welcome, Dr. Dafny. We are honored to have you
with us.
And finally, Dr. Kevin Schulman, professor of medicine,
visiting scholar at Harvard Business School, and associate
director of the Duke Clinical Research Institute. We welcome
you as well.
I want to thank each of you for being here, providing
testimony to us and insight into this important topic, and we
look forward to the opportunity to discuss healthcare
consolidation today.
And I know that you're aware that the committee is holding
an investigative hearing, and when so doing we have the
practice of taking testimony under oath.
Do any of you have an objection to testifying under oath?
Seeing none, the Chair then advises you that under the
rules of the House and the rules of the committee, you are
entitled to be accompanied by counsel.
Do you desire to be accompanied by counsel during your
testimony today?
Everyone has responded in the negative.
In that case, if you would please rise, raise your right
hand, and I will swear you in.
[Witnesses sworn.]
Thank you. They all have responded affirmatively, and thank
you for that. You're now under oath and subject to the
penalties set forth in Title 18, Section 1001 of the United
States Code, and you may now give a 5-minute summary of your
written testimony.
And at this point, I will recognize Dr. Gaynor first for
the purpose of his opening statement.
Sir, you have 5 minutes.
STATEMENTS OF MARTIN GAYNOR, PH.D., E.J. BARONE UNIVERSITY
PROFESSOR OF ECONOMICS AND HEALTH POLICY, HEINZ COLLEGE,
CARNEGIE MELLON UNIVERSITY; LEEMORE S. DAFNY, PH.D., BRUCE V.
RAUNER PROFESSOR OF BUSINESS ADMINISTRATION, HARVARD BUSINESS
SCHOOL; AND KEVIN A. SCHULMAN, M.D., PROFESSOR OF MEDICINE,
DUKE UNIVERSITY, AND VISITING SCHOLAR, HARVARD BUSINESS SCHOOL
STATEMENT OF MARTIN GAYNOR
Dr. Gaynor. Thank you.
Chairman Harper, Ranking Member DeGette, members of the
subcommittee and the committee, thank you for holding a hearing
on this vitally important topic and for giving me the
opportunity to testify in front of you today.
I am an economist who has been studying the healthcare
sector and specifically healthcare markets and competition for
nearly 40 years. I am the E.J. Barone University professor of
economics and public policy at the Heinz College of Public
Policy at Carnegie Mellon University in Pittsburgh,
Pennsylvania.
I served as the director of the Bureau of Economics of the
Federal Trade Commission in 2013 and 2014, during which time I
was involved in the many healthcare matters that came before
the commission.
I've also served the Commonwealth of Pennsylvania as a
member of the Governor's Healthcare Advisory Board and as co-
chair of its working group on shoppable healthcare.
The U.S. healthcare system is based on markets. The system
will work only as well as the markets that underpin it. These
markets do not function as well as they could or should.
Prices are high and rising. They're incomprehensible and
egregious--pricing practices. Quality is suboptimal, and the
sector is sluggish and unresponsive, in contrast to the
innovation and dynamism which characterize much of the rest of
our economy. Lack of competition has a lot to do with these
problems.
There has been a great deal of consolidation in healthcare.
There have been over 1,500 hospital mergers in the past 20
years, with nearly 700 since 2010.
The result is that many local areas are now dominated by
one large, powerful healthcare system, such as Boston with
Partners Health, Pittsburgh with University of Pittsburgh
Medical Center, and the San Francisco Bay area with Sutter.
Insurance markets are also highly consolidated. The two
largest insurers have 70 percent or more of the market and more
than one-half of all local insurance markets.
Physician services markets have also become increasingly
consolidated. Two-thirds of specialized physician markets are
highly concentrated and 29 percent for primary care physicians.
There have been a very, very large number of acquisitions
of physician practices by hospitals, so much so that one-third
of all physicians and 44 percent of primary care physicians are
now employed by hospitals.
There are a number of reasons for this consolidation, and
of course they vary across transactions. These include attempts
to enhance or entrench market position in order to maintain or
increase rates, revenue, and profits to protect market share.
There are also what one could call Newton's Third Law of
Consolidation--for every action, there is an equal and opposite
reaction. If payers consolidate, then insurance companies feel
they must consolidate to protect their position. Providers then
feel they must consolidate and so on, and you can have a
vicious cycle, not a virtuous cycle, of consolidation for
strategic reasons, not for reasons to improve the quality of
care or help patients.
Their responses to financial incentives unintended in
payment policies, specifically site-specific payments for the
same physician service, can be double or larger if a physician
practice is owned by a hospital, and the 340B program makes
drug discounts available to hospitals but not to independent
physician practices.
There are legitimate efforts to achieve scale for lower
cost, avoid unnecessary duplication, accepting risk-based
payments, better coordinate care, facilitate investments in
care coordination and quality.
There are also concerns about the future. There's been a
great deal of upheaval in healthcare over the past few years
for a variety of reasons, and sometimes entities feel that they
are protecting themselves by consolidation.
Last, one should be aware that there is a global merger
wave happening, and there are many mergers throughout our
economy. So there are undoubtedly factors that are not specific
to healthcare but that have to do with what's happening in the
economy as a whole.
Extensive research evidence shows that consolidation
between close competitors leads to substantial price increases
for hospitals, insurers, and physicians without offsetting
gains in improved quality or enhanced efficiency.
Further, recent evidence shows that mergers between
hospitals not in the same geographic area can also lead to
increases in price. Just as seriously if not more so, evidence
shows that patient quality of care suffers from lack of
competition.
Lack of competition and consolidation entrenches existing
modes of organization and delivery of care and prevents the
emerging of new and innovative ways of organizing care.
Policies are needed to support and promote competition in
healthcare markets. This includes policies to strengthen choice
and competition and ending distortions that unintentionally
incentivize consolidation.
Now, there's no one policy that will achieve all of these.
Rather, we need a constellation of policies that will work to
mutually reinforce each other.
These include focusing and strengthening antitrust
enforcement, ending policies that unintentionally incentivize
consolidation, ending policies that hamper new competitors and
impede competition, promoting transparency so employers, policy
makers, and consumers have access to information about
healthcare costs and quality.
We are facing a great challenge to our healthcare system.
If left unchecked, consolidation could undermine our best
efforts to control costs, improve care, and make our system
more responsive and dynamic.
We need new and vigorous policies to encourage beneficial
organizational change and innovation. If we fail, we will
likely have an even more expensive, less responsive health
system that will be exceedingly hard to change.
In my opinion, this is the number-one priority for
healthcare. The time to act is now.
Thank you.
[The statement of Dr. Gaynor follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Harper. Thank you, Dr. Gaynor.
The Chair will now recognize Dr. Dafny for 5 minutes for
the purposes of an opening statement.
Thank you.
STATEMENT OF LEEMORE S. DAFNY
Dr. Dafny. Chairman Harper, Ranking Member DeGette,
Representative Burgess--thank you for the kind remarks
regarding my father, your professor at the University of Texas
Medical School, Dr. Nachum Dafny--and all members of the
subcommittee and committee.
I thank you for the opportunity to testify before you today
on the subject of healthcare industry consolidation. My name is
Leemore Dafny, and I am an academic health economist with
longstanding research interests in competition and
consolidation across a range of healthcare sectors.
I am currently the Bruce Rauner professor of business
administration at the Harvard Business School and the John F.
Kennedy School of Government.
Previously, I was the deputy director for healthcare and
antitrust at the Bureau of Economics at the Federal Trade
Commission. I serve on a panel of health advisors to the
Congressional Budget Office and as a board member of not-for-
profit research organizations including the American Society of
Health Economists and the Healthcare Cost Institute.
As you're aware, we have seen consolidation within and
across a vast array of healthcare sectors, including hospitals,
health insurers, and pharmaceutical companies.
There is a substantial academic literature that finds
horizontal mergers of competing healthcare providers tend to
raise prices and very limited evidence to suggest there are
offsetting benefits to patients in the form of improved
quality.
Economists, myself included, also find that less
competition among health insurers tends to raise premiums. We
have less extensive evidence on combinations across different
sectors.
But the evidence we have to date also finds systematic
price and spending increases, in particular, after hospital
systems acquire additional hospitals in the same State and
after hospitals acquire physician practices.
In a nutshell, research to date suggests that consolidation
in the healthcare industry on average has not yielded benefits
for consumers.
Yet, I expect we'll continue to see consolidation. What
drives consolidation is the expectation of a reward for the
merging parties and their stakeholders. Those rewards are not
likely to fall dramatically without some action.
I see four primary rewards for consolidation.
First, merging parties often improve their bargaining
position, and that enhanced bargaining position can enable them
to raise price and to spend the extra on either margin or
mission, if they're so inclined.
Second, merging parties often believe that scale economies
will produce cost savings--again, fueling margin or mission.
Third, there are reimbursement rules and programs
implemented by the Centers for Medicare and Medicaid Services,
CMS, that rewards certain kinds of consolidation.
And fourth, many merging parties believe common ownership
will produce integrated care, which will enable them to realize
synergies across the many products and services that patients
require.
As I note in my written testimony, there isn't much
evidence to support the beliefs regarding scale economies or
integrated care, although every potential transaction needs to
be evaluated on its own merits.
Merging for a better bargaining position or to game
loopholes created by CMS is not value creating and often
reduces value.
Achieving more competitive markets may in fact involve
consolidation but only of the value-creating variety. There are
steps Congress can take to promote more competitive markets.
I believe it's a worthwhile investment to create public
databases containing information about the ownership and
financial links among different healthcare providers and net
commercial prices for their services.
This database could form the basis for regularly scheduled
reports and public hearings on industry consolidation and its
effects.
My counterparts with expertise on the pharmaceutical
industry can advise on a similar transparency effort with
respect to prescription drugs.
Second, additional funds could be appropriated to the
Federal enforcement agencies for enforcement-focused research.
Third, CMS could develop alternatives to its current
policies, potentially reducing the benefits for consolidation
that has already been consummated.
Fourth, and most aggressive, Congress could provide
financial incentives or impose regulatory requirements for
employers to utilize or develop so-called private exchanges
where employees can shop for their preferred health plans and
make choices that reflect their own preferences.
If consumers won't pay for a higher priced product that
doesn't offer greater value to warrant a price premium, the
incentive to merge so as to raise price will be diminished.
Healthcare is poised to capture 1 in 5 dollars in the U.S.
economy by 2020. The usual checks in place to impede
anticompetitive consolidation are muted in most healthcare
sectors.
To borrow from the medical vernacular, watchful waiting is
not, in my opinion, the wisest approach to pursue. Sometimes a
surgical intervention is necessary.
[The statement of Dr. Dafny follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Harper. Thank you very much, Dr. Dafny.
The Chair will now recognize Dr. Schulman for the purposes
of an opening statement for 5 minutes.
Welcome.
STATEMENT OF KEVIN A. SCHULMAN
Dr. Schulman. Thank you very much. Thank you, Congressman
Harper, Ranking Member DeGette, and members of the subcommittee
and committee for inviting me to talk with you today.
I would like to address the impact of hospital
consolidation on innovation in healthcare markets. We've been
talking about this already this morning, and I am going to
frame my remarks around two different types of innovation.
One is called organizational innovation, or how firms
improve their performance over time, and the second is called
disruptive innovation, or how markets evolve over time, and
we've talked about both.
First, I would like to discuss a concept called business
architecture, or the manner in which firms make decisions that
allow them to generate predictable performance over time.
A business architecture is the product of leadership,
culture, strategy, and internal organizational controls and
processes. The ability of organizations to develop stable
business architectures is one of the most revolutionary
business concepts of the last century, compared to the chaos of
the 19th century.
There is a downside to this construct, however, in that
often a business architecture, which is the way we make
decisions, leads to a rigidity of business models that can be
very difficult to dislodge.
This lens of business architecture is critical to our
assessment of healthcare policy related to hospitals. For the
last decade, we have pursued an approach of asking hospitals to
create new models of care to drive down healthcare costs.
In essence, we have asked them to replace their stable
business architectures that have made them successful as fee-
for-service providers. This would be a dramatic transformation
if any business could achieve this goal.
The business architecture of many hospitals revolves around
admitting patients for treatment, especially patients with
commercial insurance or those who require surgery.
The hospital is treated as a profit center. In other words,
the more the service is provided, the better financially for
the system.
In these models, providers and hospital networks exist to
provide patient referrals for inpatient care. Hospital mergers
extend this model by making clinical services even more costly
in multihospital systems.
To better understand the rigidity of the hospital business
architecture, we asked a sample of chief financial officers
about their planning for business transformation. We wanted to
understand what types of investments would be required to pivot
from a fee for service business model to the most extreme
value-based payment model capitation.
We found that none of the leaders we interviewed had a
clear estimate of the investment that would be required for the
same transformation and observed in the crosshair sample there
significant disagreements about how a change in payment models
would impact essential components of the budget models.
Despite almost a decade to prepare for this transformation,
there is little evidence of the development of the concrete
business plans that would be required to successfully carry out
business architecture change.
One approach to organizational change is to create a new
leadership role tasked with innovation--a chief innovation
officer. These leaders could help guide the transformation of
the delivery system to new models of care that we all desire.
Eighty percent of the largest health systems in the United
States have created such a role, and we surveyed a majority of
these individuals. While the respondents were all enthusiastic
and committed to innovation, we were very concerned after this
research. These roles were not structured or budgeted for
success.
For example, when these respondents reported that their
role was strategic--in other words, that they were responsible
for this change--their median annual budget was only $3
million. It's unlikely that investments of this magnitude can
change business architectures within these enormous,
multibillion-dollar organizations.
Large hospital systems can have other impacts on
innovation. Vertically integrated organizations are good at
developing standard business processes but are not necessarily
conducive to the type of physician-driven innovation that could
drive new care models.
In part, this concern could explain why there's little
evidence of the quality of care improving when hospitals pursue
physician employment models.
One way to reconcile these findings is to realize that,
rather than pursue business transformation that we have been
seeking, hospitals have been actively pursuing an agenda
related to market power. The impacts of market power on
business strategy and hospital investments can have sustained
impact over long periods of time.
The other type of innovation I would like to discuss is
disruptive innovation, or changes in business models within
markets. Clay Christensen has described how technology
innovation allows business innovation to bring about cost and
quality improvements for consumers.
At the core, Christensen suggests that business
architecture of existing firms is so rigid that they can't
respond to market changes that they plainly see and so are
replaced by new entrants in a process of created destruction
within markets.
Hospital-led organizations are the type of large,
inefficient firms theory suggests should be replaced. If you
wake up with a sore throat, would you rather go to a hospital
and pay for parking, wait to be seen, or just have a
telemedicine consult to tell you whether or not you need
antibiotics?
The lack of disruptive innovation is a critical shortfall
in the healthcare market. Not only could disruptive innovation
drive development of novel clinical services for patients, but
would shake up the market to spur existing hospitals to more
fully embrace an innovation agenda.
One recent study suggested that 50 percent of the increase
in healthcare costs since 1996 is related to service and price
intensity. This is the pattern of costs that would be expected
to result from the migration of clinical services to the
hospital-based business model with all of this consolidation.
Overall, all of this is a tremendous price for American
consumers to pay for the failure of an innovation agenda in
healthcare.
Thank you.
[The statement of Dr. Schulman follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Harper. Thank you, Dr. Schulman, and thanks to each of
you for the summary of your testimony.
It's now time for the Members to ask questions. Each Member
will have 5 minutes, and as Chair I will recognize myself for 5
minutes and begin.
And I will start with you, Dr. Gaynor, if I may. As you
have heard today, obviously, the cost of healthcare has
steadily risen over the past several decades, and one of the
factors that certainly we are looking at that's contributing
are the number of consolidations that have occurred in the
healthcare industry the past decade.
So my two questions for you, Dr. Gaynor: What impact has
consolidation had on patient cost, quality of care, and access
to care, and are there any indications to you that patients are
better off after consolidation or with that?
Dr. Gaynor. Thank you, Chairman Harper.
So the research evidence shows very clearly that
consolidations between hospitals that are close competitors
lead to very substantial price increases. Depending on the
exact situations, it could be as high as 50 percent but not
all.
For insurers, again, there's extensive evidence that
consolidation among insurers leads to higher premiums, and for
physician practices, again, consolidation between physician
practices that are close competitors lead to higher prices, in
some cases substantial. And last, the acquisitions of physician
practices by hospitals lead to higher prices for physician
services and more spending.
The evidence on the quality of care, I would say, is mixed.
But overall it does not show gains for patients in terms of
quality of care.
If anything, there is some evidence that shows that
clinical quality of care for patients can suffer when there's
less competition between hospitals or doctors, and we do not
see, again, consistent evidence of more coordination of care or
lower costs of care.
So this harms patients, first, because the costs of care
are higher. As we know, that when the costs of care get higher,
employers pay higher fringe benefit costs, and those get
shifted back onto workers in the form of lower total
compensation, whether it's lower wages, paying more out of
pocket for health insurance or having less generous health
insurance. The average American household hasn't seen an
increase in their real standard of living--that of healthcare
costs--in quite some time.
So it doesn't appear on average that there are benefits
that are being realized, and there are real costs.
Mr. Harper. Thank you.
And Dr. Dafny, should we be concerned about the increased
numbers of consolidation in the healthcare industry?
Dr. Dafny. Chairman Harper, thank you for the question.
Given the data that Professor Gaynor has just described and
that is described in our testimony, I would indeed be
concerned, on average.
I keep adding the ``on average'' because every
consolidation needs to be considered on its merits, and there
are a number of consolidations that are occurring right now
that are pretty novel and I wouldn't propose that those be
quashed just because on average consolidation hasn't----
Mr. Harper. Sure. So you can point to some successful
outcomes of some of these consolidations. Is that what you're
saying?
Dr. Dafny. I would like to be able to point to some
successful consolidations. I co-authored a paper with a
physician friend of mine, Dr. Tom Lee, called ``The Good
Merger,'' about what would be the characteristics of a good
merger and I am often asked, ``Can you spotlight one for us?,''
and I am searching still for a very nice example of it.
But I am sure that they exist.
Mr. Harper. Would the criteria be--as we look at these and
try to see whether they are positive or negative--is it better
outcome for the patient? Shouldn't that be at the heart of
whether it is successful or not?
Dr. Dafny. At the heart of whether it is successful, you'd
have to consider multiple dimensions. I would certainly place
patient outcomes at the top of the list. But it wouldn't be the
only dimension I would score it.
Mr. Harper. Cost possibly?
Dr. Dafny. Cost would be pretty significant, and not just
the cost to the hospitals themselves but the prices that they--
whether they pass through any cost savings.
Mr. Harper. Do you believe that the consolidations will
continue to increase in the future?
Dr. Dafny. Undoubtedly.
Mr. Harper. OK. Is there any type of healthcare
consolidation that we don't know enough about to determine its
impact on patients?
Dr. Dafny. We don't know enough, in my view, about the kind
of consolidation across the care continuum, if you will. In
theory, if you combine hospitals and physicians and post-acute
care providers and perhaps even some pharmacy elements, you
might get an integrated package product that could be superior
to the piecemeal approach that we have.
We don't know enough about whether that is likely to work
and also whether the markets are competitive enough that the
price of that product would be affordable for the value.
Mr. Harper. Thank you very much.
At this time, the Chair will recognize the ranking member,
Ms. DeGette, for 5 minutes for questions.
Ms. DeGette. Thank you so much, Mr. Chairman.
Dr. Dafny, I know the members of this subcommittee would
love to have a copy of your paper, ``The Good Merger.'' If you
could provide that to us, that would be great.
Dr. Dafny. With pleasure.
Ms. DeGette. Thanks. And then we'll help you continue to
search for a good example.
As I said in my opening statement, my colleague, Tom Reed,
and I have been looking into insulin prices, and I think that
our investigation, the facts we've learned, have broad
implications from the consolidation issues here today.
For example, the three largest PBMs control over two-thirds
of the prescription drug market, and Dr. Dafny, you noted in
your prepared testimony that consolidation enables PBMs to
improve their bargaining position with drug companies.
But wouldn't it be fair to say that PBM consolidation also
might likely result in increased prices for prescription drugs
like insulin?
Dr. Dafny. I would say that we ought to do a merger
retrospective on the most recent large PBM merger and see how
that affected downstream prices to consumers.
But, to the extent that a merger--that we've had more
consolidation, I would expect, but I haven't seen formal
statistical evidence to suggest, that prices would rise.
Ms. DeGette. Dr. Gaynor, I know you have got some expertise
in this as well. What's your view?
Dr. Gaynor. Well, I agree with my colleague. I think, just
as you suggested, Ranking Member DeGette, there is concern. We
now really only have three PBMs, in effect, in this market, and
once numbers get that small it is cause for concern.
But I agree with Professor Dafny. At this point, I do not
know of direct evidence on that. But it is time for a
retrospective, and the Federal Trade Commission, of course, has
authority through Section 6(b) of the Federal Trade Commission
Act to conduct studies of this sort in the public interest. So
that would certainly be a beneficial thing to pursue.
Ms. DeGette. That's a good avenue.
I mean, in general, if a market becomes too concentrated
with one provider system, that could potentially lead to
increases in prescription drug prices. Is that correct?
Dr. Gaynor. Yes.
Ms. DeGette. OK. Now, these inefficiencies in the market,
we think, are also affecting employer-based health insurance.
Dr. Dafny, you said the consumers in employer-based plans
need to have more choices. What can we do to encourage that?
Dr. Dafny. As you are aware, the majority of employers
offer only one choice when they sponsor health insurance to
their employees.
Now, larger employers who employ more than half of
employees tend to offer a little bit more--two, maybe three
choices. But that's not a very large set, and therefore they
tend to cater to the average consumer, don't allow you to vote
with your feet for the kinds of tradeoffs you want to make.
What could you do? Well, it is possible to encourage
employers to offer more choices, particularly through a private
exchange, which wouldn't be terribly different from what a
public exchange would be.
I am not a legal expert as to the mechanisms you would use.
But there's ERISA. There should be some possibility there. Many
years ago, it was required to offer an HMO to employees in
order to encourage that possibility, and one could imagine
minor tax preferences for the variety that you offer.
Ms. DeGette. That's an interesting suggestion.
Dr. Gaynor, back to you. A lot of people have been talking
about entirely new approaches to providing healthcare to
consumers, and we are all abuzz here about this news that
Amazon is making that it's entering the healthcare business.
You know, I know these ventures are still in their infancy.
But do you have any thoughts about the potential of Amazon or
some of these other initiatives to improve the consumer
experience and bring down costs?
Dr. Gaynor. Sure. Thank you.
Let me give one hand, other hand--a typical economist kind
of response. So on the one----
Ms. DeGette. We'd be disappointed if you didn't.
Dr. Gaynor. Right. Harry Truman is reported to say, ``Could
somebody find me a one-handed economist?''
So on the one hand--and this is the positive--a very
positive aspect of this development is that executives at major
corporations in the United States are paying attention to
healthcare costs.
For decades, healthcare costs have been a real issue for
business in the United States. But, typically, it's the domain
of human resources and executives. The C-Suite hired management
really have not paid a lot of attention to this.
So to have Amazon, J.P. Morgan, Berkshire Hathaway CEOs
stand up and say, ``This is important, we are going to do
something,'' is very, very encouraging.
It's potentially a very innovative thing. I wish it the
best of success. I hope it succeeds. We need more.
Having said that, it's not clear to me exactly what they
would do. Even these companies are small relative to the
overall size of the system.
There are very powerful, entrenched providers and insurers
and pharma companies that can be very hard for any one
employer, let alone three large employers, to deal with.
And last, again--this is the other hand here--we have seen
some of this before. If you've been around long enough--and I
think I have enough gray in my beard to qualify on that
account--employers have stood up in public before and said,
``We are going to be doing something about this,'' and yet here
we are.
Ms. DeGette. Yes. OK. Thanks. Thanks, Mr. Chairman.
Mr. Harper. Gentlewoman yields back.
The Chair will now recognize the gentleman from Texas, Mr.
Barton, for 5 minutes.
Mr. Barton. Thank you, Mr. Chairman, and thank you for
holding this important hearing.
You know, there's a saying that people like myself that run
for public office and have been around awhile kind of live by,
and it's called ``no good deed goes unpunished.''
Congress keeps trying to do the right thing in healthcare.
We've adopted two policies that we thought were positive, but
in terms of cost they don't seem to have helped much.
One is we have a Medicare differential reimbursement
between physician services provided in a physician's office and
physician services provided in a hospital setting. We pay a
higher rate because of the increased overhead charges if a
physician works for the hospital and provides the services in
the hospital.
And it appears to me that a lot of these consolidations
where hospitals are purchasing physician group practices are
simply to get the higher reimbursement rate. Now, that's a
simplification but it sure looks that.
The other program where we've kind of been bitten in the
bottom is the 340B program. We set up a system for certain
hospitals that could get a discount under the 340B program. But
they didn't have to pass that discount on to their patients,
and we've had an explosion of hospital pharmacies applying and
being accepted into the 340B program, and the oversight group
that's supposedly auditing this have admitted that they don't
have the personnel to really audit the program and that the
cost of the program is going through the roof.
So my question is, Would it be practical and possible that,
if in the case of these physician practices being purchased by
hospitals, we adopted a regulation or perhaps a statute that
said Medicare is going to pay the lower of the reimbursement
rate before the merger, instead of they always pay higher?
Would that be practical to do something like that?
Anybody can answer it.
Dr. Dafny. I am happy to take it, Representative Barton.
You have described the extended game of whack-a-mole that
Congress is playing with various healthcare sectors and
probably other sectors as well, and I want to return--I will
answer your question, but I want to return to the point before.
If we had a competitive downstream market, you might not have
to play that game as much because market forces would walk away
from health plans that overpaid for the same service rendered
in a hospital than in a lower-cost site of service.
So the original program was designed to cover costs, and
hospitals are more costly and so you paid them more. But as you
have noted, now it's being exploited.
It's my understanding that Medicare has in place the policy
already for future acquisitions to not be able to bill at the
hospital rate, but to bill at their initial rate or the lower
rate.
The real question, I think, is about rolling back. Do you
say over a certain period of time we are going to move towards
site-neutral payments so as not to continue to encourage more
spending in this inefficient way but recognizing that hospitals
have revenue streams and employment and other things, so
recognizing there may need to be some other form by which
hospitals are compensated, but not in a way that distorts their
incentives of where to supply services.
Mr. Harper. OK.
Dr. Gaynor. If I may just add something on top of what
Professor Dafny said. One thing we see very commonly is that
there are important spillover effects from the Medicare program
onto what private health insurers do. And so a lot of private
health insurers followed Medicare in adopting higher payments
for hospital-based or hospital-owned practices.
So the salutary effects of reform to Medicare payment would
be not just on the Medicare program itself, although,
obviously, that would be hugely beneficial, but could actually
have larger effects that would affect what private insurers do,
because right now private insurers continue with these larger
payments.
Then there are still incentives, in spite of what Medicare
has done for a hospital as to acquired physician practices.
Mr. Barton. Finally, on 340B, what if we adopted a statute
or regulation that said whatever the discount is, it has to be
passed through to the patient?
Dr. Schulman. I think that would provide a huge incentive
to go back to a practice model that we had that was much less
expensive for consumers.
When 340B was passed in 1992, there were 90 safety net
hospitals that were eligible. There are now over 2,000
hospitals that are eligible.
Drugs, expensive medications, in 1992 were hundreds of
dollars. They are now $100,000, and so, you know, if you can
make $25,000 per drug on this discount, it's just a tremendous
incentive to distort the market.
Mr. Barton. I know my time had expired. But let me ask Dr.
Dafny: Baylor Scott & White merger--good or bad?
Dr. Dafny. You know, I am under oath. But also, I don't
have evidence. I do have a quote, though--a paraphrase of a
quote. I was surprised to read the CEO in charge of the
transaction after the fact said, ``Well, once we are merged, we
are going to figure out what efficiencies might be there.''
In my world, I prefer you to consider that before you make
a deal like this.
Mr. Barton. Well, they're both in my district, you know,
when they were separate. Now that they're merged, the biggest
hospital actually in my district is the Baylor Scott & White
Hospital in Waxahachie, and everybody loves them.
With that, I yield back.
Mr. Harper. The gentleman yields back.
The Chair will now recognize the gentleman from New York,
Mr. Tonko, for 5 minutes for questions.
Mr. Tonko. Thank you, Mr. Chair, and welcome to our
witnesses.
I would like to start with the consolidation of providers
and how that affects consumer prices.
Dr. Dafny, in your testimony you state, and I quote,
``horizontal mergers of competing healthcare providers tends to
raise prices.'' And it's not just hospitals. You note that
physician market concentration has also led to higher prices.
Dr. Dafny, can you briefly explain how these different
types of mergers can have harmful effects as they relate to
consumer prices?
Dr. Dafny. OK. So on a hospital side, let me start with
that.
On the hospital side, hospitals have bargaining power vis-
a-vis the insurers if they're unique in some way such that
excluding them from an insurer network would force the insurer
to have to lower premium or not be able to make sales.
If two competing hospitals that are attractive to enrollees
and are substitutable for one another decide to merge, then the
insurer can't play them off against each other when negotiating
rates.
The insurer is likelier to need to include that joint
entity in the insurer network, and therefore they can bargain
for a higher price. Higher prices for healthcare services are
then likely to be passed through as higher premiums.
In the case of physician practices, there are a few
different factors at play. Often, that's more of a vertical
transaction upstream. The hospital is acquiring the physician
downstream for a variety of reasons.
One is, as Representative Barton was talking about, in
order to be able to charge higher prices because the physician
is now affiliated with a hospital, and that's just kind of a
mechanistic element of Medicare and of other private insurance
programs.
Another motivation can be to funnel more physician
referrals upstream to your hospital. And then finally, to the
extent that there's a horizontal element, so now you have many
more, say, of a specialty group, you can do the same thing.
Negotiate to have that cardiology group included in an
insurance network, they can charge a higher price, and there is
evidence that I cited here that there are higher commercial
insurance prices as a result of hospital acquisitions of
multiple physicians.
Mr. Tonko. Thank you. Thank you.
When providers merge, they often cite the potential to
leverage their combined size to reduce costs. However, Dr.
Dafny, you have explained that there actually isn't much
evidence to support this theory in practice.
So why is that, and why are there insufficient incentives
for providers to drive down costs?
Dr. Dafny. So, I might aspire to reduce my costs following
a merger. But at the same time, if I gain market power, I am
going to have less of a market incentive to be efficient and be
able to bring my price down. So there's less incentive to
achieve it.
And then it's quite possible that there's a lack of know-
how to get it done. I do cite one study by a student of mine
who finds some cost reductions when a hospital system out of
the area of another hospital acquires the target and can bring
costs down.
However, my own research shows, using a similar sample,
that they bring prices up if they acquire a hospital in the
same State. So even if costs go down, those don't seem to be
passed through to consumers, and most studies don't find
evidence that costs do go down.
Mr. Tonko. OK. And again to Dr. Dafny, is the Medicare
program particularly vulnerable to some of these problems, or
do we see this in private insurance plans as well?
Dr. Dafny. Medicare, as you know, has administered prices,
so they're not as vulnerable to the post-merger price
negotiations. But if you eliminate your rivals, then you also
eliminate or reduce the incentive to compete on other
dimensions that patients value.
So that's one point. The second point is that, of course,
Medicare has its rules that we discussed that reward certain
kinds of consolidation, and so they'd be vulnerable in that
respect as well.
Mr. Tonko. Thank you.
And with the time that I have left, I would like to turn to
consolidation amongst insurers and how they tend to raise
premiums.
You did a study of what we call mega merger and found that
premiums increased not just for enrollees of these insurers but
even for enrollees of rival insurers.
Can you tell me how these sorts of mergers can have that
ripple effect throughout the insurance market?
Dr. Dafny. Absolutely. It's what you'd expect in any
oligopolistic market where there are just a couple of
competitors.
By merging, you're able to raise your price, because those
customers who really like the product that you're offering
can't get one from your substitute, assuming you merge with a
substitute, and then that relaxes price competition for your
rivals.
So it's kind of a double whammy. It is not just when
hospitals merge, say in a raised price, it's not just their
prices that go up. It spills over to others in the marketplace.
Mr. Tonko. Thank you very much, and with that I yield back,
Mr. Chair.
Mr. Harper. The gentleman yields back.
The Chair will now recognize the gentleman from Virginia,
the vice chair of the subcommittee, Mr. Griffith, for 5
minutes.
Mr. Griffith. Thank you very much, Mr. Chairman.
Dr. Gaynor, you touched on it a little bit earlier. A lot
of us have concerns about having only basically three PBMs left
in the market after all the mergers, and in fact in 2015 at a
Judiciary Committee hearing, Professor Thomas Greene suggested
it was time, just as you did, maybe for the FTC to take a look
at the PBM market and the effects of consolidation. Even FDA
Commissioner Scott Gottlieb has mentioned in that same hearing
that he was concerned that PBMs were using their increased
market power to prevent other market participants from growing
or merging. So I appreciate your comments this morning.
And Mr. Chairman, I have and would ask unanimous consent to
submit a letter I have received from the National Community
Pharmacists Association outlining their concerns about PBM
consolidation and the impact it is having on independent
pharmacists.
Mr. Harper. Without objection.
[The information appears at the conclusion of the hearing.]
Mr. Griffith. Thank you, Mr. Chairman.
Is there anything you wanted to expand on that before I
move to the next subject, Dr. Gaynor?
Well, thank you. I appreciate you answering those questions
from Ms. DeGette. As often in some of these occasions, she and
I tend to be going after the same area.
Dr. Dafny, I have a merger that has just occurred. It's a
little bit unusual because the concerns primarily were, can we
keep the hospital systems afloat? Two hospitals, East Tennessee
and Southwest Virginia, merged. We are waiting to see if costs
go up. People are very concerned about it. It just happened--
finalized last month. They are now Ballad Health. I would love
to see your article on the good merger so I can start looking
at some of those numbers.
But the concern there was one of the hospitals actually
went under in one of the two systems. They're two fairly large
systems, by our standards in rural America, that merged. I
think they have 21 hospitals now.
So they're pretty good-sized. They're hoping they can stay
afloat. That was our concern. It wasn't for financial reasons,
that they were going to make more money. It's can they survive.
Any comments? Do you know anything about that merger?
Dr. Dafny. If I may, I am familiar with that transaction.
In fact, I authored a public comment on it which may have been
cosigned by my colleague here, Dr. Gaynor.
Mr. Griffith. Were you pro or con?
Dr. Dafny. I was concerned.
Mr. Griffith. OK.
Dr. Dafny. Concerned because the hospitals sought and were
granted, as you're aware, a certificate of public advantage
because the Federal enforcement authorities were concerned that
there was effectively mergered a monopoly in many of these
areas.
And when you say the hospitals did so because they were
concerned that they would remain afloat, what goes off in my
head is a bell that says ``price increase, price increase.''
How are you going to remain afloat unless you thought your cost
reductions could be so substantial jointly than apart? You
might be trying to use your stronger negotiating position to
wrest higher prices from commercial payers, and that would make
the economic environment less competitive.
I am aware the FTC did an extensive investigation, and if
they had found those cost projections credible, I believe they
wouldn't have tried to challenge the transaction. So I am
concerned.
Mr. Griffith. Yes. A number of my constituents are
concerned, but we also want to make sure we have hospitals
because, if you shut one down, it's not like there's another
one right around the corner. It's usually around a mountain and
down a mountain and up another mountain before you can get to
the next hospital, and that creates concerns as well.
But I appreciate that. Dr. Gaynor, you had something? Or
Dr. Schulman.
Dr. Gaynor. If I may just add something. The use of
certificates public advantage to shield merging parties from
antitrust scrutiny, I think, is not the right policy. I
certainly understand the vulnerabilities and the concern over
communities in these kinds of situations.
But there are other ways to achieve these goals and, of
course, as is well known, there is a failing firm defense for
antitrust scrutiny. So that is taken into account. And the
concerns that my colleague expressed certainly apply.
Mr. Griffith. And I appreciate that.
Dr. Schulman, I want to blow things up. I want you to think
about it because I don't have time to get an answer per se. But
I want you to think about ways we can help blow up and make the
market more innovative.
I really like that part of your statement and your
concerns. Telemedicine--I think a big part of that is being
held back by the CMS payment model and the fact it takes an act
of Congress to get some new payment arrangements.
I think we have to take a look at the Stark Act. I have
rural areas that are underserved, where I have room in a
nursing home, but they can't set up an opportunity there for
somebody from the community to come in.
I know we don't want them colluding on the nursing home
patient. But we have space there that the community could use
in an underserved area that we can't because we can't have
telemedicine in the nursing home for a hospital an hour and a
half away.
Can you give us advice--and I am out of time--but can you
give us advice on what laws we need to change to make the
system for reimbursement on CMS more efficient to recognizing
that there are new ways to do this?
Dr. Schulman. Yes, absolutely. I think we have a limited
amount of time. But the idea--when I got my licensure in North
Carolina, they basically explicitly told me unless I saw the
patient, you know, I would be in violation of the medical
practice.
So, you know, that's not the world that we live in today.
We need to experiment with these kinds of innovation models,
see which ones work and then deploy them.
Mr. Griffith. Well, if you have language I would be very
interested in it because I would like to blow up the way we do
the reimbursements so we can blow up the medical system and
make costs come down.
I yield back, Mr. Chairman.
Mr. Harper. The gentleman yields back.
The Chair will now recognize the gentleman from California,
Mr. Peters, for 5 minutes.
Mr. Peters. Thank you.
Just following on Mr. Griffith's comment, in the veterans
mental healthcare field, I see a huge opportunity for
telemedicine, and you have got all sorts of issues with
reimbursements but also with cross-State licensing, and I would
certainly enjoy working with the gentleman on figuring out ways
to loosen that up.
I had some questions about transparency and markets, and
Mr. Gaynor, you talked about no publicly available data on
total U.S. healthcare costs and utilization or prices for
specific services or providers.
Do you have an idea about the first steps you'd advise
Congress to take to help Federal and State authorities achieve
that kind of transparency about cost and quality?
Dr. Gaynor. Sure. Thanks for asking the question.
At present, the issue is not that the data aren't there.
The data exist. We have great data from the Medicare program.
CMS has done a great job with this. Medicaid resided at the
State level, and private parties hold the data as well.
But on the private side, it's not easy to access, and it's
not easy to access in an aggregate way. So finding a way to
encourage, support, finance these activities. So one
possibility, we provide financing for a national data
warehouse.
Mr. Peters. But for what? What would it look like? So----
Dr. Gaynor. Right.
Mr. Peters [continuing]. You know, I would want to know
what the money was being spent on.
Dr. Gaynor. Of course. Of course.
So one question is, What is actual total healthcare
spending for the United States at any given point in time?
Right now, we rely on estimates done very skilfully by the
national health expenditure accounts at CMS. But they don't
actually have comprehensive data from the private side.
So for Congress and the U.S. Government, just knowing what
that is, drilling down into those data, knowing what various
things cost, being able to compare Medicare, private, Medicaid,
and various issues. For businesses, being able to get that
information. It's surprising, but many businesses don't know
what things cost, let alone individuals.
Mr. Peters. Well, with regards to that side of it rather
than the regulatory side of it, which is sort of these
aggregates you describe, can we expose the markets to this
information in a way that helps consumers and users make better
choices?
Dr. Gaynor. Well, sure. The saying ``a little sunshine can
be the best disinfectant'' I think is very real, and I can give
my hometown of Pittsburgh as an example. We know that we have
UPMC dominating the entire market, but nobody knows actually
what the prices are for anything. My colleagues, Zack Cooper
and Stuart Craig and John Van Reenen, studied this issue using
data from about a third of all people with private health
insurance in the United States, and we found huge amounts of
variation for simple things like an MRI of your knee--600
percent variation in a geographic market, but nobody knew that
before.
Mr. Peters. And Dr. Dafny, I guess you had some comments
about this, too, with respect to information about ownership
and financial links.
Dr. Dafny. I do, and I have a bit of a response to your
preceding question, if I may. Two acronyms--APCD and HPC. So
the----
Mr. Peters. Air Pollution Control District? Sorry.
[Laughter.]
Dr. Dafny. Probably not an exclusive acronym.
Mr. Peters. Right.
Dr. Dafny. All Payer Claims Database and the Health Policy
Commission. So my new home State of Massachusetts--I've only
been there a year and a half--uses its All Payer Claims
Database to create summary measures across different hospitals
of average commercial prices, and not just for certain kinds of
procedures but also for an entire patient life that is
attributed to a given system of care. So this State has decided
to take the data that it has access to and put out transparent
reports on it, which enables the public to weigh in on all
sorts of consolidation, both one that the dominant system
partners were trying to do a couple years ago--everybody used
the HPC data to make their public comments and such, the deal
did not happen--and right now there's another big deal that is
under consideration, and many parties are using the data that
the HPC put out to try to assess that transaction.
So I think making the data available possibly through an
All Payer Claims Database and possibly through State agencies
who are responsible for monitoring, including notifications of
material transactions, which is what the HPC does.
Mr. Peters. So assuming that we have additional
consolidation, though, any thoughts on exposing prices to
consumers that can help them? Is there an example of someone
doing that well?
Yes. I got four seconds.
Dr. Gaynor. New Hampshire. Well, I agree with what
Professor Dafny said about Massachusetts. They've done a great
job, not just assembling the data but using it in a meaningful
way and bringing it to bear.
New Hampshire also has an All Payer Claims Database, and
there is some recent evidence on that by a young scholar named
Zack Brown, who's joining the Economics Department at the
University of Michigan, that shows that consumers actually did
use the All Payer Claims Database for shopping, and it did
drive prices down, and further, that providers responded to
that because they knew there were some people out there
looking. You don't have everybody in the market informed--just
enough so that sellers know that somebody might not come to
them if the price isn't competitive.
And it did have impacts, but I think we are still in the
infancy of these things.
Mr. Peters. Thank you. My time is expired. Thank you, Mr.
Chairman.
Mr. Harper. The gentleman yields back.
The Chair will now recognize the gentleman from Texas, Dr.
Burgess, for 5 minutes.
Mr. Burgess. Thank you, Mr. Chairman.
Well, as you might imagine from my opening comments, I am
interested in one of the things that's kind of been left out of
this discussion, is physician ownership of facilities.
And we live in a world where, unfortunately, it is possible
for hospitals to own doctors but it is not possible for doctors
to own hospitals, at least it hasn't been since March the 19th
of 2010, when the Affordable Care Act was signed into law.
So having come from a world--my dad started a physician-
owned hospital. It was in a pretty rural area of north Texas. I
don't think there would have been a hospital there if he and
six or seven of his partners had not decided to take the
financial risk and do that. So I think there was a positive
aspect to that as far as the delivery of care.
But have we really gone to the point where no longer is it
reasonable, feasible, or desirable for physicians to own the
facilities in which they practice?
And I will ask everyone that question. So, Dr. Gaynor,
we'll start with you, and then we'll come down the line.
Dr. Gaynor. Well, as you know, historically, physicians did
own lots of hospitals, particularly smaller ones in rural
areas, and that changed over a long period of time for a
variety of reasons.
I don't know specific evidence on the impacts of physician
ownership, in part because, as you said, it's so rare. But
there is some evidence on a related area having to do with
ACOs, and it seems that physician-led ACOs do tend to be more
effective than in hospital-led ACOs.
So I don't want to make a great leap from there to
physician ownership of all kinds of facilities, but that might
suggest that there could be some gains from that.
I think we want think carefully about this, but I don't
know that it's sensible to completely exclude a large group of
knowledgeable participants in the healthcare system from
engaging in a certain way and possibly doing some innovative
and beneficial things.
Mr. Burgess. Yes, I agree with you. It makes no sense by
virtue of the academic degree that I hold, I am excluded from a
certain type of business process, but lawyers and even
registered nurses could engage in that practice.
Dr. Dafny, do you have anything you'd like to add?
Dr. Dafny. I concur with Dr. Gaynor on this. I would say
that I am aware of the moratorium on physician-owned specialty
hospitals that would limit competition in the marketplace and
so, all else equal, is likely to lead to worse service and
higher prices.
That said, I would say two things. One is that I am
concerned about self-referrals, not just in that context, in
general. So one would want to have controls in place to try to
address that.
The second is that there is research--it's not at the top
of my head now--that suggests some cream skimming. You would
typically want to send the cases that are riskier to a full-
service hospital.
So I would just say--so I wouldn't be surprised if that
were true, and that might well be really efficient. I would
just say that then we ought to make sure that there are
mechanisms to reimburse the hospitals appropriately.
Mr. Burgess. I would just--and I do refer you to the
article from Health Affairs from 10 years ago, because it is so
well-written and so concise and puts the argument forward so
reasonably--but I will just tell you, from my own experience,
if I had a relatively minor case to do on a Friday morning, if
I scheduled that in the hospital, I would be behind an
orthopaedic procedure and possibly some other procedure and
then, by golly, if I didn't start by noon or 1 o'clock, I could
get bumped from an appendectomy in the emergency room, and I
might spend all day waiting to get that case done.
If it's scheduled at a physician-owned outpatient center--
``Doctor, we are glad to see you, your case is ready''--and
literally before I've done the dictation on the first case, the
next case is ready to go.
So when time is so critical, if I've got a case that
reimburses at a lower rate--say, it's a self-pay or Medicaid
patient--do I want to go to the facility where I am going to
burn all day waiting to get it done, or do I want to go to the
facility where it's going to be done quickly and then I can get
onto the next?
So Dr. Schulman, I've come to you with the time I have
left.
Dr. Schulman. Yes. So I think at some level the
generalization of this is a broader question: What's the
optimal structure of the delivery system?
You know, if we go back 20 years ago, this hearing would
have been about how do doctors and insurance companies work
together to keep patients out of hospitals. We spent a decade
working on that.
Our rhetoric has changed, and we are worried about now the
tremendous costs that are coming from thinking about healthcare
being centered in hospitals.
And so maybe the pendulum has really swung way too far, and
the way we can save money for Medicare and everything else is
by addressing utilization, paying freestanding physicians to
keep patients out of hospitals, and the big challenge is now
the capital that's required to do all these things with the
regulatory controls, with electronic health records and
everything else, is very rarely available to individual
physicians.
Mr. Burgess. And then the other thing that's left out of
this discussion is the advancing complexity of what we are able
to do, tools that are available today that people hadn't even
thought of 20 or 25 years ago when I was in medical school. It
is indeed a new world, and in some cases it's very expensive.
But I, for one, am grateful some of those things are available.
Mr. Chairman, I will yield back and thank you for the
recognition.
Mr. Harper. The gentleman yields back.
The Chair will now recognize the gentlewoman from Florida,
Ms. Castor, for 5 minutes.
Ms. Castor. Thank you, Mr. Chairman, and thank you to the
witnesses who are here today.
I would like to start by addressing an implication that was
left, and I just want to make sure the record is clear. We've
heard an argument that the 340B program, which helps bring
vital medications to the country's most vulnerable patients,
has somehow caused consolidation in the healthcare industry,
and since we are citing Health Affairs articles I wanted to
make sure for the record we cite the 2017 Health Affairs
article that found little evidence that the expansion of
hospital 340B eligibility contributed to hospital acquisitions
of physician practices.
Instead, researchers found that the increase in
consolidation trends were tied to much broader trends, and I
think that is clear and you don't have to be a healthcare
expert to understand that.
But I wanted to ask you, Dr. Gaynor, considering that 340B
is such a small portion of the overall healthcare sector in
America, isn't it fair to say that there are larger market
forces at play that are driving hospital consolidation?
Dr. Gaynor. Thanks for the question.
Certainly, with regard to hospitals. With regard to
physician practices, the effects--you're correct--are not going
to be broadly across physician practices, because it doesn't
touch all kinds.
But oncology in particular, there is evidence that the 340B
program does lead to consolidation, and I think the issue has
been not about the program itself--I think it's broadly agreed
it's a beneficial and important program--but really how the
payments should be structured.
Ms. Castor. And I think we all agree on greater
transparency would be beneficial. But I just wanted to make
sure that the implication was not left that 340B is the large
driver of hospital consolidation. And yes, we have some issues
involving oncology practices with----
Dr. Gaynor. Yes. Yes, indeed.
Ms. Castor. OK.
Dr. Gaynor. Agreed.
Ms. Castor. So, as we consider the trends of consolidation
in healthcare overall, it is important to keep the focus on the
patients and any cost savings that can be achieved and that
these consolidations are not going to cost consumers more.
So my takeaway from your testimony today is there's not a
lot of evidence that demonstrates that mergers are resulting in
improved care and cost savings.
Dr. Dafny, you said you're still searching for examples of
where consolidation has helped improve the quality of care
overall, and you note that generally one of the arguments in
favor of mergers is that they should enable more integrated
care, which has been a goal of overall healthcare reforms, and
that's rather appealing. That's an appealing argument.
What does the research say about how effective mergers have
been in improving integration of care, and why?
Dr. Dafny. Thank you for the question, Representative
Castor.
When it comes to looking for a good merger, I am looking
for one that's good on potentially multiple dimensions. So
quality would just be one of those dimensions--better quality,
but a huge price increase may not be worthwhile.
You asked about whether mergers have led to more integrated
care, and I will tell you that I have not seen research that
has addressed that question directly, apart from when hospitals
acquire physicians--and to the extent that you might think that
physicians then would try to keep patients out of the hospital,
and the hospital would be compensated for that somehow through
the joint venture because they would be bearing some of the
total risk for the span of that population--you might think
spending would go down, and that is not what has happened. So
to the extent that that's a measure of what the impact is of
mergers on integrated care, then it's not very positive.
I will add that, if you thought that these mergers were
about integrating care, you ought to see a lot more across
different kinds of providers than the same old provider but in
lots of different areas or next door.
Ms. Castor. OK.
Dr. Gaynor, could you speak a bit further to this
distinction and explain why benefits integration may help or
hurt consumers?
Dr. Gaynor. Sure. Well, just to follow up on this,
consolidation is not integration. The acquisition--its
transactions are very involved, they're a big deal, but in some
sense, that's the easy part. Once the acquisition has happened,
bringing the two entities together and integrating is really
hard and, unfortunately, we have just not seen that.
So why don't patients see the benefits of this? As my
colleague just said, we don't tend to see more integrated care.
We don't tend to see higher quality. So it just hasn't tended
to be there for patients to realize, and informally one thing
that market participants have said is the following: Raising
prices is easy, lowering costs is hard. And there's a lot of
truth to that. Driving down costs, integrating care, improving
the quality of care is actually really, really hard work. It's
not easy.
Whereas, if one obtains a better negotiating position, then
going around and getting a higher price is substantially easier
than that.
So, unfortunately, I think that the payoffs and the
incentives move in such a way that they've led market
participants to take the high prices and not do the hard work.
I do want to be clear, though. This is not every
transaction. I am not characterizing every transaction this
way. I feel that there are good mergers out there, as well,
but, again, maybe we'll find one one of these days, but I can't
point to one specifically.
Ms. Castor. Thank you very much.
Mr. Harper. The gentlewoman yields back.
The Chair will now recognize the gentleman from New York,
Mr. Collins, for 5 minutes.
Mr. Collins. Thank you, Mr. Chairman. I want to thank our
witnesses. I think there's a lot of agreement across the board
and concern about consolidations and the like not having the
impact we wanted on healthcare cost.
But back to a good merger. I have a very rural district--
you know, eight counties with a declining population, thanks to
our Governor. We keep losing people in New York.
So we look for a good merger. I have four, five, or six--I
am going to call them a merger, I don't know, merger versus
acquisition--but rural hospitals that, frankly, would have gone
out of business had they not merged with a much larger
healthcare system, either the city of Buffalo or city of
Rochester, which reached out, took, in many cases, ownership
and bought the hospital short of that hospital shutting down,
and in doing so also were able to then extend orthopaedic
services, cardiology services that, frankly, that small rural
hospital wasn't even able to provide beforehand.
So when you say we are searching for a good merger, isn't
that an example of a good merger, having a large healthcare
system buy an effectively bankrupt rural hospital that was
unique but, frankly, was not offering a full menu of services?
Dr. Dafny. It might well be. I would say that only a tiny
fraction of mergers generate competition concerns. Fewer than 3
percent trigger FTC investigations.
So when I say I am looking for examples, it's because case
studies have yet to be published to consider all the factors.
Just keeping a hospital open in and of itself is not enough, in
my view, for it to be good if that was realized, again, through
price increases that made healthcare less affordable for people
in the region.
So I would need to do a more thorough analysis to address
your question.
Mr. Collins. Well, I know you're from Boston and nothing--
not putting it aside, if you get out to rural America, and it's
a 2-hour drive--2 hours from, you know, Wyoming County or
Orleans County, New York, into the city of Buffalo, and there's
a single hospital and, literally, because of a decline in
population, whether it's the number of births or otherwise,
they don't have the ability to drive that revenue and certainly
not provide, you know, the oncology, the cardiology services,
to suggest you can't see a benefit when--if that hospital shuts
down and those people have to drive an hour and a half to the
next hospital--I am a little bit dumbfounded that you can't see
the obviousness of that. And not to be insulting, unless--I
mean, Boston, you can get your--other than the traffic--so I am
truly concerned you can't see the obviousness of that benefit.
Dr. Schulman. Yes, I think--I think we've all said, you
know, each of these has to be examined on their own. North
Carolina is facing a lot of the same issues. We are losing
hospitals in all the rural counties, the same way in Virginia.
But at the same time, you have to look at what's happening
to the behavior of the consolidating systems. We are debating
right now a merger of two very large systems. The rationale was
they're going to improve access to rural healthcare, but
there's really actually no evidence that in fact the planning
is there.
If in fact they don't do that, after the mergers there's no
recourse, and we have talked about a certificate of public
advantage. One of the hospitals that has operated under
certificate of public advantage for a long time was Mission
Hospital in Asheville, North Carolina. That certificate of
public advantage is now expired, and the first thing they did
was terminate their contract with the largest insurer in asking
for rate increases.
So, you know, I think each of these markets has to be
looked at separately. So there are advantages, and rural
healthcare is a huge challenge. Some of that is because the
hospitals in the city offer much higher prices--salaries to
their starting docs.
Dr. Dafny. I mean, I will add to that, if I may.
The technology of healthcare has changed. It used to be the
case there wasn't much you could do for patients except for put
them in the nearby hospital, quarantine them, and comfort them,
and so every area had one.
But as now we've grown more specialized, it may well not be
an interest of those patients to have orthopaedic advanced
cardiology, oncological services at low scale. So just to say
that the hospital is open and has expanded services, as I said,
wouldn't be enough for me to assess whether that----
Mr. Collins. Well, so, again, not to belabor the point, but
what they've done is, they'll send an orthopaedic one day a
week to that rural hospital now that the patient's--you know,
whether it's a knee or a hip--can now see a doctor 10 minutes
away and not 2 hours away.
So, again, not to be confrontational, but for somebody that
lives in a very rural area as I do, we can't get hung up on--
you know, what's the price if there is no service? You know,
talk about, you know, you can't put a price on that when there
is no service.
So I think you should look more into these rural--call them
mergers or acquisitions--because in my case, it's that or
nothing.
So thank you very much. I yield back.
Mr. Griffith [presiding]. The gentleman yields back.
I now recognize Ms. Schakowsky of Illinois for 5 minutes.
Ms. Schakowsky. Thank you. I want to apologize to our
witnesses and just say I am the ranking member on another
subcommittee, so I had to be there.
Let me just say, or maybe just ask, I mean, I am assuming
that when we are talking about rural hospitals that those
States that have expanded Medicaid, that that has been helpful
in many communities that would otherwise be underserved.
Does anybody just want to say anything to that? I don't
know. OK. You don't have to.
All of you have acknowledged that we've seen rapid
consolidation in hospitals. Specifically, this trend has
resulted in a 22 percent increase in religious hospitals
between 2001 and 2016. I don't know if research has been done
on this, but this is a big concern for me. As we see more and
more religious hospitals merge with nonreligious hospitals,
many times the nonreligious hospitals are forced to observe
religious prohibitions, particularly restrictions limiting
access to a full range of reproductive services by denying
abortion care, birth control, fertilization treatment, and I am
concerned that consolidation limits access to reproductive
care, particularly for women, communities of color, and LGBT
people.
Currently, one in six hospital beds are subjected to
religious restrictions. Because hospitals treat the most
serious health conditions like women suffering from
miscarriages or ectopic pregnancies, I worry that accepting
these restrictions in consolidation are causing hospitals to
put business considerations before comprehensive patient care.
So my question--anyone could answer--Dr. Dafny listed it as
someone, but anyone can answer--does your work touch on an
increase in religious and nonreligious hospital mergers
acquiring, or strategic acquisition or strategic partnerships?
Dr. Dafny. My published research does not address that. I
am aware of two findings that are relevant, and I could tell
you about them.
One is there is a researcher at Kansas University, David
Slusky, who has in fact shown that acquisitions of formerly
nonreligious hospitals by specifically Catholic healthcare
systems has led to a reduction in this slew of reproductive
services that you described, would support that concern about
the availability of those services.
What isn't known is whether these patients then go
elsewhere to receive some of those services.
Ms. Schakowsky. If it's available in their communities.
Dr. Dafny. If it's available.
And then the second is in my own study, which is in the
midst of a referee process, we have a section analysis that we
did actually comparing the acquisition of hospitals by
religious versus nonreligious systems, and the price increases
that we find on average are not present for the acquisitions by
the religious hospital systems.
Ms. Schakowsky. Yes, Dr. Gaynor.
Dr. Gaynor. Yes, thanks. Thanks, Representative Schakowsky.
That's an excellent question.
Broadly speaking, when a merger is being considered by an
antitrust enforcement agency, the questions about impacts on
consumers and consumer welfare and the points that you raise
are certainly relevant and should be taken into account because
price matters a great deal, of course, but what services are
available to people and where and what the alternatives are as
well as quality of care are also vitally important.
Ms. Schakowsky. I hope that will be part of the
considerations when we look at the issue of consolidation
because, you know, a lot of people think a hospital is a
hospital and don't know that the services they may want--they
may be delivering a baby, would like to have a tubal ligation
at the same time, find that that is not possible and require
another procedure somewhere else, if they can possibly get it.
So what effect do you think these mergers could have on
access to full range of healthcare services? Do they
disproportionately affect some groups more than others?
I mean, I think probably what you have said would agree
that, obviously, women, but I think it's also often people of
color and LGBTQ community.
As we think about ways to evaluate these mergers, then I am
assuming that you all agree that other factors should be
considered to ensure the full range of services that are
maintained for reproductive health, and are there any red flags
that would indicate the consolidation would result in reduced
access to reproductive health services. I think you answered
with the Kansas study. Any comments on that?
And so let me ask this, then: What steps can we take to
incentivize that a full range of reproductive healthcare
services are maintained?
Dr. Schulman. You know, I think we talked a little bit
before about the organization of care, more generally, and at
some level one of your questions is, you know, why are we
organizing all the care around hospitals, especially women's
services, which can be done in ambulatory settings, can be done
in doctors' offices?
Why did we let them get acquired by the hospital, and so
how do you have a diversity of services in a community where
there are different kinds of care models to address the needs
of the entire population?
Ms. Schakowsky. If they're available. I mean, we are
talking about overall access to these kinds of procedures which
I think lots of women want, and my time is up. But I think this
cannot be shoved under the table as just another thing, since
women are the majority of the population.
And I yield back.
Mr. Harper [presiding]. The gentlewoman yields back.
The Chair will now recognize the gentleman from Michigan,
Mr. Walberg, for 5 minutes.
Mr. Walberg. Thank you, Mr. Chairman, and thanks to the
panel for being here.
Dr. Gaynor, on September 9th, 2011, the Ways and Means
Health Subcommittee held a hearing on healthcare industry
consolidation. You were a witness at that hearing.
You testified on some of these issues and on consolidation
since that time. What's changed in these last 7 years? Give us
some hope.
Dr. Gaynor. I have more gray hair.
Mr. Walberg. At least you have hair.
[Laughter.]
Dr. Gaynor. Thank you.
Mr. Walberg. Be gentle on the rest.
Dr. Gaynor. So, yes. Unfortunately, I reviewed that
testimony while preparing for this hearing, and I wish I had
good news. But if anything, I would say that consolidation has
accelerated.
One might wonder, actually, how hospitals or doctors or
insurers are finding anybody left to consolidate with. Almost
30 percent of all hospitals have been involved in one or more
transactions. But it's accelerated, and, like I said, I think
we are finding a lot of insurance markets, hospitals, physician
practice markets that are more and more concentrated, so there
becomes less and less choice and less and less competition,
And 7 years ago, I think, we were hoping, again, that we'd
see some of this consolidation would lead to integration, lead
to some new innovative forms of organizations and delivery, and
as my colleagues Dr. Schulman and Dr. Dafny have said, we just
haven't seen that. There are a few instances here and there,
but it just hasn't happened.
So I guess I will put the dismal in the dismal science,
being an economist, and things have gotten worse, not better. I
wish I could report differently.
Mr. Walberg. At least I don't feel out of the normal, then.
In my district, I can't think of a hospital that hasn't gone
through some type of consolidation. All across my seven-county
district and even with the medical practices, individual
doctors, they're consolidating together in their own clinics,
creative, until they get pulled into a hospital.
One concern that we've heard is that regulators only
scrutinize consolidation when a single proposed merger is seen
as large enough to attract attention based on how consolidated
the market will become if it goes through. The issue, however,
is that a large number of small mergers and acquisitions might
not attract Government attention but eventually may limit
competition in the market.
So, Dr. Gaynor, is it true that some physician acquisitions
may be so small that Federal antitrust enforcers might not even
know about increases in provider concentration in some markets?
Dr. Gaynor. So thanks for the question.
Yes, that's certainly possible, because they're small
enough that there's not mandatory reporting requirements under
Hart-Scott-Rodino acquisition law.
But I think it's important to be aware that the agencies
scrutinize these things, that they look for reports in the
media, that they're actually market participants that report on
things that seem troubling to them, and the number the FTC, for
example, has pursued, physician consolidations--one in
southeast Pennsylvania recently, another out on the West
Coast--that did not meet the reporting requirements were
relatively small.
There is a very tough issue about that you just identified.
What happens if the initial acquisition is not that big? It
doesn't look troublesome, and then the next one and the next
one. But then, unfortunately, you have got a problem.
Mr. Walberg. Especially as you think of rural areas, as my
colleague mentioned.
Dr. Gaynor. Right. Right. Again, rural areas have their own
special qualities. We do want to make sure that folks that live
there have access to the kind of care that they need at a
reasonable price, but we do have to be concerned about untoward
effects there.
So I think that looking at potential competition impacts is
important. But I will be honest, that's challenging. We don't
want to deny acquisitions or mergers that are potentially
beneficial, and we don't want to get overly speculative.
But these things do need to be taken into account. Now,
ultimately the courts--if you go to court on this--are the
arbiters on this, and I think that's actually in reality a very
tough standard with the courts.
Dr. Schulman. In our State, North Carolina, there's two
very large health systems that are trying to merge, and what's
really remarkable is that no one's in charge of the private
health insurance market.
You know, so we have impacts on Medicaid, impacts on
Medicare, impacts on Blue Cross Blue Shield North Carolina, but
there's not one office or commission like there is in
Massachusetts that's responsible for monitoring the market.
So we are out trying to collect primary data to see what
the impacts of these mergers might be. The idea of having an
all-payer database so that you knew that this cardiology
practice is the only one left in this county and is about to
get acquired would be really critical information to intervene
long before you get to the Federal Trade Commission.
Mr. Walberg. Thank you. My time is expired. I yield back.
Mr. Harper. The gentleman yields back.
The Chair will now recognize the gentlewoman from Indiana,
the chair of the Ethics Committee, Mrs. Brooks, for 5 minutes.
Mrs. Brooks. Thank you, Mr. Chairman.
I have a question, Dr. Dafny, because we started to talk a
little bit about Federal enforcement, and I don't think we've
talked very much about Federal enforcement.
In your written testimony, you indicate that Federal
enforcement authorities have interpreted their enforcement
authority in such a way that it's limited in scope. And I am a
former U.S. attorney, not that I was involved in these kinds of
issues, but something that caught my interest. More
specifically, you indicated it's difficult to define markets in
nonhorizontal transactions.
Do you think we are likely to see more nonhorizontal
transactions in the healthcare market as the Department of
Justice and the FTC continue to successfully challenge
traditional horizontal mergers? Can you talk a bit more about
the enforcement landscape?
Dr. Dafny. Absolutely, Representative Brooks. Thanks for
the question.
I have great interest in these consolidations and in the
ability, or rather how limited the ability is, of antitrust
enforcement to ensure competitive markets.
As you're aware, antitrust enforcers have very narrow laws
to enforce, and I mentioned in my testimony and will restate
here that their interpretation of Section 7, the Clayton Act,
which is the statute that is used to challenge mergers, is that
they must define the relevant market in which competition would
be diminished by the transaction, which, if you don't dwell on
it too long, sounds like a perfectly sensible thing to do, but
if you're an antitrust enforcer and you're versed in all the
judicial precedents, then you realize whatever market you
propose in one case could affect markets you might propose in
another case.
So the Federal Trade Commission has successfully won merger
challenges by demonstrating that many hospital markets are
quite small and a merger of rivals in a relatively narrow area,
even if there are many competing providers in the general
vicinity, can lead to significant price increases because
people would like to be able to go to their nearest or very
nearby hospital.
When you talk about nonhorizontal, now we are--suppose the
different hospitals in different towns in a State seek to
merge, then they arguably would not be in the same relevant
antitrust market for purchase--for the patients who are going
to the hospital. But an insurer facing a conglomerate that has
a substantial presence throughout the State may then have to
pay a higher price to that consortium of hospitals because the
insurer has a broader market and wants to be sure that it can
offer multisite employers a comprehensive, broad network.
So defining the relevant market when it comes to
negotiating with insurers, that might be different than the
market that you might use when you're thinking about patients
accessing hospitals. And as a result, because of the way this
has been interpreted, the Federal antitrust authorities seem
very reticent to bring cases that involve combinations across
different sectors, across different towns.
Mrs. Brooks. So what type of tools do you think or
knowledge might be necessary for Federal enforcement
authorities to, you know, examine these proposed mergers or the
mergers?
And I think you mentioned it, the public database. Or what
are some tools that you think would be helpful?
Dr. Dafny. I think trying--the bigger mountain of evidence
that one can build to support that this might be problematic if
in fact it is will be helpful, which is one of the reasons I
called for more enforcement-focused research. When I left the
Federal Trade Commission, it was the first project I started to
do.
But there's not such a great volume of people who are
trying to do enforcement-focused research. So I would put the
data out there and allocate resources to the authorities so
they can investigate this. And this is not just in hospitals,
this is in pharmaceutical companies. If you merge but you're
not making the same therapeutic line somehow, is competition
diminished either in subsequent introductions or through the
prices that you negotiate because you often negotiate with the
same purchasers? There's a host of crossmarket questions that I
think need to be investigated.
Mrs. Brooks. Dr. Gaynor.
Dr. Gaynor. Representative Brooks, very excellent question,
and it's a broad issue. It's very important in healthcare. But
it's important for the entire economy.
So one thing that can be done and actually needs to be done
is to revise the vertical merger guidelines. If I recall, and
my memory is not wonderful, I think they were last revised in
1984, and it's always been important, but particularly with so
much consolidation at the horizontal level, the vertical
issues, in my view, become even more prominent and salient in
healthcare, but actually much more broadly as well.
So that's one very concrete thing that can be done and I
think would help address this issue.
Mrs. Brooks. Thank you.
Dr. Schulman, do you have any opinion on it?
Dr. Schulman. Nothing.
Mrs. Brooks. Thank you. I yield back.
Mr. Harper. The gentlewoman yields back.
The Chair will now recognize the gentleman from Georgia,
Mr. Carter, for 5 minutes.
Mr. Carter. Thank you, Mr. Chairman, and thank all of you
for being here. I have a great deal of respect for your
academic achievements and for your expertise in this area, and
I thank you for that.
There is currently a proposed merger between two companies,
Luxottica--and they are an Italian company that makes eyeglass
frames--and another company, Essilor, which is a French company
that makes the lens itself.
So here we have a proposed merger between these two
companies. They will be owning not only the eyeglass frames but
also the lens, as well, and oh, by the way, they will also own
EyeMed, which is the second largest vision insurer in the
country, and oh, by the way, they also own retail outlets such
as Pearle Vision Center, such as LensCrafters--all fine
businesses, but now you have this vertical integration, if you
will, of a company that owns just about everything in that
area, and now they will have the ability to drive market to
their different companies.
I wanted to ask you, Dr. Dafny, from a free market
principle, does this make sense? I mean, is this the kind of
thing we need to increase competition?
I understand that competition dictating healthcare prices
or corporations that dictate prices because they control the
market. Which one works better?
Dr. Dafny. I will be the economist again and say, you know,
there are two sides of this. But what you described, the
vertically integrated offering, might well be much more
efficient than the piecemeal offering.
So this could be beneficial. The question is, by combining,
are they somehow lessening competition because might they
withhold their frames from other purchasers, right?
Mr. Carter. And that's exactly why I have a bill--imagine
that--H.R. 1606, the DOC Access Bill, which addresses this, to
address the free market principles and to have competition.
Full disclosure: Prior to becoming a Member of Congress, I
was a practicing pharmacist for over 30 years. I have witnessed
firsthand the impact that PBMs and the consolidation of PBMs
and drugs stores have had on patients.
Now, this is something I--this may be the trainee training
the trainer here. OK--this is the part that I think that I have
seen firsthand that perhaps you haven't seen: the impact on the
patient.
In my 30 years of practice of pharmacy, I was a retail
pharmacist and I serviced generations of families--
grandparents, parents, children, and grandchildren--and I've
seen that, and they've become trustful of me and trustful of
their community pharmacist, of their independent pharmacist,
and you build up that relationship.
And I've had them walk into my business, when I was still
practicing, literally in tears, saying, ``I've got to go to
another drug store. My family has used your drug store all our
lives. My grandparents, my parents, they've used your
pharmacies. I've used it for my children and for my
grandchildren. Now I've got to go to another pharmacy because
my insurance company owns that pharmacy, and they're telling me
I have to go over there.''
That's the real-life impact that we see through this
consolidation. You mentioned before that PBMs control over 80--
there are three PBMs that control over 80 percent of the market
share.
Now, if you look at the mission statement of the PBMs, it
will say that they are there to lower drug prices. I want to
ask you, How is that working out?
If it's working out well, Dr. Schulman, why is the
President identifying escalating prescription prices as being
one of the things that we need to address in this country?
Dr. Schulman. I think, you know, we've been talking about
PBMs a little bit today. This is the least transparent business
model of any of the things we've been talking about in the
country.
So, in 2015, there were approximately $115 billion passed
back from pharmaceutical manufacturers to PBMs and to drug
distributors. Some of that was passed back to employers. Almost
none of that was passed back to consumers.
Mr. Carter. And do we know how much was passed back to
employers?
Dr. Schulman. We don't know.
Mr. Carter. We don't, because--Dr. Gaynor, you said earlier
that sunlight was the best transparency out there. It's
infected out there. We have no transparency. Dr. Dafny, you
said you were with the FTC. Why does the FTC not look into
this? Why are they not doing something about this?
Dr. Dafny. I mean, the FTC has jurisdiction to do certain
things. They could do a study, and one thing we mentioned was a
study of the effects of the last transaction that they did not
challenge, a big merger in the----
Mr. Carter. And this is getting worse before it gets
better. Now all of a sudden we see where CVS Caremark is going
to buy Aetna.
Dr. Dafny. In fact, your description of the dental
consolidation sounded very much like that integration.
Mr. Carter. That was not intentional. But nevertheless, the
point that I want to make here is that I think the one thing we
may be missing is the impact it has on patients.
This does have an impact on patients. When you talk about
having trust between the healthcare provider and a patient,
that is invaluable. Between a doctor and a patient, that
relationship is so hard to build, and yet we have insurance
company--and listen, I used to call these guys crooks, and I
still do when I get upset. But they're not really crooks,
they're smart businesspeople. They're exploiting the system
that we here in Congress are not doing our job. We are not
making the changes that should be made to prevent this from
happening, and it frustrates me.
Dr. Schulman. Well, we've talked about the impact to
patients a good bit from a lot of these consolidations. The
research that we've been talking about in terms of costs and
quality, most of that used claims data. Very little of that
actually interviewed patients to see what happens in towns when
basically they raise the parking price at the hospital to----
Mr. Carter. And you know it does impact them. It impacts
accessibility. It impacts compliance.
Dr. Dafny. I know your time is expired, but I have to say
this, which is patients are an afterthought when it comes--if
they even get to be an afterthought--when it comes to
discussions of consolidation. I've been privy to a number of
them.
Mr. Carter. Thank you.
Dr. Gaynor. Just one last plug to reinforce what you said
is that all these things interact in a way that makes things
worse. So the issues with choice of pharmacy are compounded by
lack of choice, lack of competition in health insurance.
If folks could say to the health insurance company, ``Go
take a hike, I will go to another insurer that's offering me
access to the pharmacy,'' then you bet you'd get access to
these pharmacies. But if the insurers don't have to compete,
they won't.
Mr. Carter. Mr. Chairman, thank you for your indulgence.
Mr. Harper. Thank you very much. The gentleman from Georgia
yields back.
The Chair will now recognize the gentleman from
Pennsylvania, Mr. Costello, for 5 minutes.
Mr. Costello. Thank you, Mr. Chairman.
Dr. Gaynor, during the '90s, the FTC had lost multiple
hospital merger cases, but since then it appears that they have
successfully challenged multiple hospital mergers after
refining their approach.
Can you describe what the FTC did as a part of this
retrospective study and how the FTC's approach to hospital
merger review has changed?
Dr. Gaynor. Yes. Representative Costello, thank you for the
question. Good to see a fellow Pennsylvanian here, albeit----
Mr. Costello. Some people would suggest that western
Pennsylvania and eastern Pennsylvania, we----
Dr. Gaynor. Yes. Yes. Albeit from that other part of the
State.
Anyhow, yes. So, as you note, the FTC encountered a string
of losses in the courts in which merging hospitals defended the
mergers on a variety of bases, either geographic markets that
were very, very broad so there were lots of potential
competitors in those supposed markets that were saying, ``We
are not for profit, we wouldn't do anything naughty.''
And the FTC, rather than prospectively going after mergers,
took a break, commissioned a number of studies that looked at
mergers that had actually occurred--between Evanston
Northwestern Hospital and Highland Park Hospital in the suburbs
of Chicago, between a number of hospitals in Wilmington, North
Carolina, between Summit and Sutter in the Bay Area--and what
those studies found is that those mergers which had already
happened, which had been consummated and been consummated for a
number of years, led to very substantial price increases. I
think some of the price increases from the Bay Area merger were
40 or 50 percent or higher--Evanston Northwestern, as well.
And they didn't stop there. They looked at quality of care
for patients because that's vitally important, and they did not
see evidence of improvements and quality of care. Some
declines, some no change. So what that did is, that gave them
an evidence base to go into mergers to try and block a merger
prospectively, which would change the presumption.
Now, the other thing that happened at the same time is that
researchers in academia have been undertaking a lot of studies
because data had become more widely available, and that added
to the evidence base, as well.
And then the first merger they went after was a
retrospective rather than a prospective--Evanston Northwestern
and Highland Park.
So that's how they swung things around. It was a concerted
effort by then-Chairman Ramirez and the staff at the FTC.
Mr. Costello. Thank you.
Dr. Dafny, in your testimony you indicated you will expect
that we will continue to see more consolidation. Why do you
think we'll continue to see more consolidation? Will we see it
more, do you predict, in standard horizontal consolidation, or
will we start to see it more in vertical arrangements?
Then the final point is if you could lend any observations
on the health insurance industry and how, either through
acquisition of assets that then creates an insurance company or
an insurance company acquiring assets by way of hospital and
physician practices, what kind of dangers might be inherent in
that?
Dr. Dafny. OK. I will try to address those questions in the
time remaining.
I believe we'll see more consolidation because the factors
that are encouraging it don't seem to be changing. I went
through some of the rewards in my testimony, but include the
fact that if you merge you often have a better bargaining
position, can raise your prices. You might be able to reduce
your costs or think you could reduce your costs, even though
there's not much evidence that that actually happens.
And there are some administrative reasons. Medicare and
private insurers reward certain kinds of consolidations--say,
enabling hospitals to charge more for the same service that
might be supplied by a physician independently more cheaply. So
I think that the factors that are driving the consolidation are
still present.
I do believe that, because the Federal Trade Commission,
the Department of Justice have been pretty active in horizontal
merger enforcement in healthcare, that we are seeing more
vertical or nonhorizontal consolidation. You're seeing hospital
systems merging across different geographic areas, and their
answer would be ``because we think we can do that, and we think
we'll be better together,'' and the concern is to the extent
that they compete, then they might have less of an incentive to
be better once they've taken out a potential entrant or a
rival.
On the insurance side--now we are out of time--I would say
that the results of research on insurance mergers also show
premium increases when there's less competition in a market--
that a hospital or a group of providers that bears risk is
going to be performing a lot of the functions of an insurance
company. But so long as they can't offer health plans, then
they may not be able to pass all the savings along to patients.
Mr. Costello. How about access to care?
Dr. Dafny. What about access?
Mr. Costello. Well, in terms--is there concern over
limiting access to care on that patient?
Dr. Dafny. Well, I think, if you eliminate essential health
benefits, you would have a concern--or allow the purchase of
nonqualified plans or not enforce the individual mandate--I
think you may have more access issues.
Mr. Costello. Thank you. I yield back.
Mr. Harper. The gentleman yields back.
That concludes our hearing. We want to say a special thank
you to each of you for taking the time. It's very informative--
very important topic for the future of healthcare.
And at the end of the day, we should be considering patient
care and outcomes and improved cost for those patients as we
look at this ahead.
I remind Members that they have 10 business days to submit
questions for the record, and I ask that the witnesses agree to
respond promptly should you have any questions.
With that, the hearing is adjourned.
[Whereupon, at 12:22 p.m., the committee was adjourned.]
[Material submitted for inclusion in the record follows:]
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[Dr. Dafny did not answer submitted questions for the
record by the time of printing.]
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