When it comes to health care, bigger isn't always better

With mergers raising prices by more than 20% without improving quality, consolidation should be considered carefully

The economist Herb Stein famously quipped, “If something can’t go on forever, it will stop.” New York state’s hospitals and policymakers should take note.

Though hospitals are consolidating and getting bigger, health care cost controls and technology are crushing the demand for hospital beds. We can be sure that tomorrow’s hospital industry is going to be much more competitive—and much smaller—than the collection of behemoths we have today.

For two decades, hospitals nationally have played defense—consolidating to increase market power, and shifting from inpatient to outpatient care to counteract a decline in bed utilization.

New York state hasn’t been any different. From 1999 to 2014, the number of hospital beds per 1,000 people plummeted by 36%. This makes sense, given that hospital visits fell and outpatient visits grew.

The simple truth is that hospitals exist to treat patients with significant illnesses that require labor- and technology-intensive services. They can afford technology that a physician’s office would find ¬prohibitively expensive, bring in specialists to treat complicated illnesses and offer surge capacity for epidemics or mass-casualty events.

But how many hospitals do we really need in a health care system focused on efficiency and prevention? With more than a dozen mergers in the Empire State since 2012, hospitals seem to think the old way of doing business will remain highly profitable—at least if you’re big enough. In the era of health care reform, that’s a bad bet.

As we discuss in a report released last week, New York state already has highly consolidated hospital markets. Such mergers can raise prices by more than 20% without improving quality. In a worst-case scenario, New York’s Medicaid reform efforts, which rely on essentially creating 25 massive hospital systems statewide, may end up being stymied by the size and clout wielded by big systems.

Step back, though, and it becomes clear that the smart money today is focused on keeping patients out of hospitals.

Employers are getting serious about sending patients with complicated conditions to centers of excellence that specialize in certain diseases or procedures. While Medicare penalizes hospitals for readmissions within 30 days, new physician-led, accountable care models make money by keeping people out of hospitals in the first place.

To survive, hospitals will need to offer greater specialization and efficiency (or lower prices).

The remaining hospitals will have to accept much more risk for managing overall population health. That means fewer beds, more outpatient clinics, and—yes—fewer mergers.

Intermountain Healthcare in Utah sees the writing on the wall, guaranteeing to hold price increases to consumer inflation in new contracts with employers. It will pay for this with $2 billion in savings during the next few years. By concentrating on efficiency for the costliest patients, Inter-mountain is betting that it can coordinate care without compromising quality, producing a better and more cost-effective product.

Bigger isn’t always better. In health care, it’s usually just more expensive.

Remember, if something can’t go on forever, it won’t. The winners in New York’s hospital industry will be the ones who take that to heart. 

Paul Howard is a senior fellow and director of health policy at the Manhattan Institute. Yevgeniy Feyman is a fellow and deputy director of health policy.

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