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Impact of Hospital Consolidations

August 20, 2012 By Lucas Smith, Undergraduate Research Fellow

Over the last generation, the number of independently owned Minnesota hospitals has been declining. Two of the more aggressive at acquiring rural medical facilities have been Duluth-based Essentia Health and Dakota-based Sanford Health, now the nation's "largest, rural, not-for-profit health care system," according to its web site. "Sanford has more than doubled its presence in Minnesota from a decade ago," the Star Tribune reports. It serves more than 40 Minnesota communities through a series of hospitals and clinics.

Other Twin Cities health systems are also expanding into Greater Minnesota communities. About 41% of Minnesota hospitals are still independent, which comprises the largest single group of hospitals. The historical trend, however, shows a steady decline since at least the late 1980s, according to the graph below from the Minnesota Department of Health.

There is little indicating this trend will change course or level off. Health care is becoming more sophisticated and specialized. From a health perspective this is good news. Coupled with a healthy lifestyle, preventative, well-coordinated care, medical advances can lead to longer, higher quality lives. However, expenses for hospitals can easily escalate. With cuts and changes in Medicare and Medicaid, and shifting demographics for baby boomers, small rural medical facilities have a hard time keeping up with a changing industry.

The economy of scale and purchasing power that come with larger health systems make it financially advantageous for smaller communities to merge with these multi-state, multi-facility medical groups in some cases.

In fact, the Affordable Care Act (ACA) may have unknowingly strengthened the trend of consolidation. A June Robert Wood Johnson Foundation (RWJF) report shows that by emphasizing bundle payment and Accountable Care Organization, the ACA has pushed hospitals closer together.

However, according to a 2006 RWJF report, the preponderance of evidence suggests that hospital consolidation increases prices for consumers. How much varied from study to study, but it could be between a 5% and 50% increase in the price of medical care. One might argue that Minnesota would offer a different story because rural sparcity and its not-for-profit hospitals. Here's the problem, the most comprehensive and rigorous studies examine nationwide trends. Minnesota's unique circumstances should be examined independently. 

The result of these mergers on quality is mixed. Part of the reason is that quality varies procedure to procedure, so it’s hard to make really sweeping generalization about the quality of hospital care post-merger.

Moving from the country side to medical facilities in more densely populated metropolitan areas, some studies show that competition increases quality under certain circumstances, according to the June RWJF report. In the case of administrative pricing, where prices are set by an organization like Medicare, studies have found that the competition results in better quality of care.

In the case where prices are negotiated between providers and insurers, studies also show that competition improves quality because hospitals use the quality of their care to attract individuals within an insurance network. This shows that while hospital consolidation might not result in a direct decline in quality of care, it does trade-off with a competitive approach that is superior.

Again, the story might be different in Minnesota. There is anecdotal evidence hospital consolidations are beneficial, especially in the context of rural care. Theoretically, hospital mergers allow smaller hospitals to retain qualified physicians and purchase technology. Judith Neppel, executive director of Minnesota Rural Health Association, told MPR that, "I'm hearing that generally the communities are satisfied.” But it is a little early to know the long-term impacts, she conceded.

Policymakers face a bit of a quandary when it comes to evaluating the evidence. As mentioned above, the most rigorous studies are not specific to Minnesota, leaving more anecdotal evidence to determine Minnesota’s quality and cost outcomes.

This shouldn't be a partisan issue or an assault on large hospital chains, but a warning that health care economics is changing and stakeholders must get involved to ensure we're delivering high-quality outcomes that are financially sustainable, especially for Minnesotans and primary care providers

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  • Steven Miller says:

    August 21, 2012 at 8:53 am

    Interesting and thoughtful article.  Another medical organization that is expanding rapidly is the Mayo Clinic, which you didn’t mention.  They are expanding their patient base to feed the “big complex” in Rochester.